The accompanying notes are an integral part of the consolidated financial statements.
During the year ended December 31, 2017, $854,647 and $566,033, representing the fair value of the shares of Common Stock issued to owners of Series B Preferred Stock and owners of Series C Preferred Stock, respectively, were accounted for as stock dividends in the statement of changes in stockholders’ deficit and was charged to accumulated deficit against additional paid in capital and Common Stock therein.
During the year ended December 31, 2017, the Company accrued a cash dividend in the amount of $9,400, in the aggregate, to be paid to holders of its Series A Preferred Stock and a stock dividend in the amount of $1,420,680, in the aggregate, representing the fair value of the shares of Common Stock to be issued to owners of Series B Preferred Stock and of Series C Preferred Stock, in lieu of cash dividends. The Company has not paid such dividends, plus interest at a rate of 9% per annum, as of the date of this filing.
During the year ended December 31, 2016, $308,239 represents the fair value of warrants issued as consideration for placement agent services and were accounted for as Warrants with Down-Round Protection within long-term liabilities. Of these direct issuance expenses $102,088 were allocated to the Series C-1 and Series C-2 Warrants and was recorded as a reduction of additional paid in capital, and $206,151 was allocated to the Series C Preferred Stock and recorded as a reduction of temporary equity.
During the year ended December 31, 2016, $341,662, represents the amount classified out of stockholder’s deficit and presented as Warrants with Down-Round Protection within long-term liabilities (See Note 2U and Note 9C).
During the year ended December 31, 2016, $647,215 and $152,480 represents the fair value of the shares of Common Stock issued to owners of Series B Preferred Stock and owners of Series C Preferred Stock, respectively, were accounted for as a stock dividend in the statement of changes in stockholders’ deficit and was charged to accumulated deficit against additional paid in capital and Common Stock therein.
During the year ended December 31, 2015, 100 shares of Series A Preferred Stock and 400 shares of Series B Preferred Stock were converted into 17,242 and 68,966 shares of Common Stock, respectively. Accordingly, $58,817 and $178,720, representing the carrying value of such shares of Series A Preferred Stock shares of Series B Preferred Stock, respectively, were reclassified from temporary equity to stockholders’ deficit.
During the year ended December 31, 2015, 6,931 shares of the Company’s Series A Preferred Stock were exchanged into 6,931 shares of Series B Preferred Stock. In addition, 1,440,880 Warrants with down-round protection were exchanged into 1,200,710 Series B-1 Warrants and 1,200,710 Series B-2 Warrants. As a result of the exchange, the balances of the Series A Preferred Stock and the Warrants with down-round protection decreased by $4,076,688 and $1,
587,556
, respectively and the balances of the Series B Preferred Stock, Series B-1 Warrants and Series B-2 Warrants increased by $3,502,536, $1,833,876 and $1,612,186, respectively. In addition, the Company recorded a non-cash charge in the amount of $1,284,354 included in finance expenses within the Company’s statement of operations.
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
A.
|
Integrity Applications, Inc. (the "Company") was incorporated on May 18, 2010 under the laws of the State of Delaware. On July 15, 2010, Integrity Acquisition Corp. Ltd. (hereinafter: "Integrity Acquisition"), a wholly owned Israeli subsidiary of the Company, which was established on May 23, 2010, completed a merger with A.D. Integrity Applications Ltd. (hereinafter: "Integrity Israel"), an Israeli corporation that was previously held by the stockholders of the Company. Pursuant to the merger, all equity holders of Integrity Israel received the same proportional ownership in the Company as they had in Integrity Israel prior to the merger. Following the merger, Integrity Israel remained a wholly-owned subsidiary of the Company. As the merger transaction constituted a structural reorganization, the merger has been accounted for at historical cost in a manner similar to a pooling of interests. Integrity Israel was incorporated in 2001 and commenced its operations in 2002. Integrity Israel, a medical device company, focuses on the design, development and commercialization of non-invasive glucose monitoring devices for use by people with diabetes.
|
|
B.
|
Going concern uncertainty and management plans
|
Since its incorporation, the Company did not conduct any material operations other than those carried out by Integrity Israel. The development and commercialization of Integrity Israel's product is expected to require substantial expenditures. Integrity Israel and the Company (collectively, the "Group") have not yet generated significant revenues from operations, and therefore they are dependent upon external sources for financing their operations. As of December 31, 2017, the Group has incurred accumulated deficit of $
47,368,612
, stockholder's deficit of $
16,574,933
negative operating cash flows and negative working capital. Management considered the significance of such conditions in relation to the group’s ability to meet its current and future obligations and determined that these conditions raise substantial doubt about the Group’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. During the years ended December 31, 2016 and December 31, 2017, the Company raised funds in an aggregate amount of approximately $10.33 million (net of related cash expenses) through the issuance of 12,003.8 units (the “Series C Units”), each consisting of (a) one share of the Company’s newly designated Series C 5.5% Convertible Preferred Stock, par value $0.001 per share (the “Series C Preferred Stock”), convertible into Common Stock at an initial conversion price of $4.50 per share, (b) a five year warrant to purchase, at an exercise price of $4.50 per share, up to such number of shares of Common Stock issuable upon conversion of such share of Series C Preferred Stock (each a “Series C-1 Warrant”) and (c) a five year warrant to purchase, at an exercise price of $7.75 per share, up to such number of shares of Common Stock issuable upon conversion of such share of Series C Preferred Stock (each a “Series C-2 Warrant” and, together with the Series C-1 Warrants, collectively, the “Series C Warrants”). During the year ended December 31, 2017, the Company raised funds in an aggregate amount of approximately $352,250 (net of related cash expenses) through the issuance of 94,444 units (the “Series D Units”) each consisting of a) one share of Common Stock
, Par Value $0.001
b) a five year warrant to purchase, at an exercise price of $4.50 per share, up to such number of shares of Common Stock issued c) a five year warrant to purchase, at an exercise price of $5.75 per share, up to such number of shares of Common Stock issued d) a five year warrant to purchase, at an exercise price of $7.75 per share, up to such number of shares of Common Stock issued.
Until such time as the Group generates sufficient revenue to fund its operations (if ever), the Group plans to finance its operations through the sale of equity or equity-linked securities and/or debt securities and, to the extent available, short term and long term loans. There can be no assurance that the Group will succeed in obtaining the necessary financing to continue its operations as a going concern.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
As described in Note 1A and Note 1B above, the Group has a limited operating history and faces a number of risks and uncertainties, including risks and uncertainties regarding continuation of the development process, demand and market acceptance of the Group's products, the effects of technological changes, competition and the development of products by competitors. Additionally, other risk factors also exist, such as the ability to manage growth and the effect of planned expansion of operations on the Group's future results and the availability of necessary financing. In addition, the Group expects to continue incurring significant operating costs and losses in connection with the development of its products and marketing efforts. The Group has not yet generated material revenues from its operations to fund its activities and therefore is dependent on the receipt of additional funding from its stockholders and/ or new investors in order to continue its operations.
NOTE 2
|
–
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).
|
A.
|
Use of estimates in the preparation of financial statements
|
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. As applicable to the consolidated financial statements, the most significant estimates and assumptions relate to (i) the fair value estimate of the Warrants with down-round protection,
(ii)
the allocation of the proceeds and the related issuance costs of the Series C Units, (iii) the going concern assumptions, (iv) measurement of stock based compensation, and (v) determination of net realizable value of inventory.
The functional currency of the Company is the US dollar, which is the currency of the primary economic environment in which it operates. In accordance with ASC 830, “Foreign Currency Matters” (ASC 830), balances denominated in or linked to foreign currency are stated on the basis of the exchange rates prevailing at the applicable balance sheet date. For foreign currency transactions included in the statement of operations, the exchange rates applicable on the relevant transaction dates are used. Gains or losses arising from changes in the exchange rates used in the translation of such transactions are carried as financing income or expenses. The functional currency of Integrity Israel is the New Israeli Shekel ("NIS") and its financial statements are included in consolidation, based on translation into US dollars. Accordingly, assets and liabilities were translated from NIS to US dollars using year-end exchange rates, and income and expense items were translated at average exchange rates during the year. Gains or losses resulting from translation adjustments are reflected in stockholders' deficit, under “accumulated other comprehensive income (loss)”.
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Official exchange rate of NIS 1 to US dollar
|
|
|
0.288
|
|
|
|
0.260
|
|
|
|
0.256
|
|
Increase (decrease) of the Official exchange rate of NIS 1 to US dollar during the year:
|
|
2017
|
|
|
10.90
|
%
|
|
|
|
|
|
|
|
|
2016
|
|
|
1.48
|
%
|
|
|
|
|
|
|
|
|
2015
|
|
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 2
|
–
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
C.
|
Principles of consolidation
|
The consolidated financial statements include the accounts of the Company and its subsidiary. All intercompany balances and transactions have been eliminated in consolidation.
|
D.
|
Cash and cash equivalents
|
The Group considers all short-term investments, which are highly liquid investments with original maturities of three months or less at the date of purchase, to be cash equivalents.
Inventories are stated at the lower of cost or net realizable value.
Cost is determined as follows:
With respect to raw materials, the Group calculates cost using the average cost method.
With respect to work in process and finished products, the Group calculates the cost on the basis of the average direct manufacturing costs, including materials, labor, subcontracting costs and other direct manufacturing costs.
Management evaluates whether inventory reserve for slow-moving or obsolete items is required. To date, the Group has recorded reserves with respect to its inventory in the amount of
approximately
US$ 756 thousand.
|
F.
|
Property and equipment, net
|
|
1.
|
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. When an asset is retired or otherwise disposed of, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition is reflected in the statements of operations.
|
|
2.
|
Rates of depreciation:
|
|
%
|
Computers
|
33
|
Furniture and office equipment
|
7-15
|
Leasehold improvements
|
Shorter of lease term
and 10 years
|
|
G.
|
Impairment of long-lived assets
|
The Group's long-lived assets are reviewed for impairment in accordance with ASC 360, “Property, Plant and Equipment”, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. To date the Group did not incur any material impairment losses.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 2
|
–
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
H.
|
Long-term restricted cash
|
Restricted cash is invested in certificates of deposit, which are used to secure Integrity Israel’s obligations in respect of its headquarters lease. See Note 9B.
The Group accounts for income taxes in accordance with ASC 740, "Income Taxes". Accordingly, deferred income taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and the tax bases of assets and liabilities under the applicable tax law. Deferred tax balances are computed using the enacted tax rates expected to be in effect when these differences reverse. Valuation allowances in respect of deferred tax assets are provided for, if necessary, to reduce deferred tax assets to amounts more likely than not to be realized.
The Group accounts for uncertain tax positions in accordance with ASC Topic 740-10, which prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements. According to ASC Topic 740-10, tax positions must meet a more-likely-than-not recognition threshold. The Group’s accounting policy is to classify interest and penalties relating to uncertain tax positions under income taxes, however the Group did not recognize such items in its fiscal 2017, 2016 and 2015 financial statements and did not recognize any liability with respect to unrecognized tax position in its balance sheet.
|
J.
|
Liability for employee rights upon retirement
|
Integrity Israel's liability for employee rights upon retirement with respect to its Israeli employees is calculated pursuant to the Israeli Severance Pay Law, based on the most recent salary of each employee multiplied by the number of years of employment of each such employee as of the balance sheet date. Employees are entitled to one month's salary for each year of employment, or ratable portion thereof for periods less than one year. Integrity Israel makes monthly deposits to insurance policies and severance pay funds.
The deposited funds may be withdrawn upon the fulfillment of Integrity Israel's severance obligations pursuant to Israeli severance pay laws or labor agreements with its employees. The value of the deposited funds is based on the cash surrender value of these policies, and includes immaterial profits or losses.
Commencing in 2011, Integrity Israel’s agreements with its Israeli employees are in accordance with Section 14 of the Severance Pay Law. Payments in accordance with Section 14 release the employer from any future severance payments in respect of those employees. Related obligations and liabilities under Section 14 are not recorded as an asset or as a liability in the Company's balance sheet.
Severance expenses for the
year
ended December 31, 2017, 2016 and 2015 amounted to $145,979, $147,754 and $111,030 respectively.
Revenues are recognized in accordance with ASC 605, "Revenue Recognition" and SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition”, when delivery has occurred, persuasive evidence of an agreement exists, the fee is fixed and determinable, collectability is reasonably assured and no further obligations exist. Provisions are made at the time of revenue recognition for any applicable warranty cost expected to be incurred (See Note 2N).
The Company derives its revenues from sales of its GlucoTrack® model DF-F glucose monitoring device to distributors. The Company's products sold through agreements with distributors are generally non-exchangeable, non-refundable and non-returnable and, to date, the Company has not granted to any of its distributors any rights of price protection or stock rotation. Accordingly, the Company considers its distributors as end-users for revenue recognition purposes.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 2
|
–
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
L.
|
Research and development expenses
|
Research and development expenses are charged to operations as incurred.
|
M.
|
Royalty-bearing grants
|
Royalty-bearing grants from the OCS to fund approved research and development projects are recognized at the time Integrity Israel is entitled to such grants, on the basis of the costs incurred and reduce research and development costs. The cumulative research and development grants received by Integrity Israel from inception through December 2004 amounted to $93,300. Integrity Israel has not received any research and development grants since December 2004.
N.
Warranty
The Group provides a 24-month warranty for its products at no cost. The Group estimates the costs that may be incurred during the warranty period and records a liability for the amounts of such costs at the time revenues are recognized. For the
year
ended December 31, 2017, 2016 and 2015 warranty expenses were $8,540 and, $8,605 and $1,157 respectively.
|
O.
|
Basic and diluted income (loss) per share
|
Basic income (loss) per share is computed by dividing the income (loss) for the period applicable for Common Stockholders by the weighted average number of shares of Common Stock outstanding during the period. Securities that may participate in dividends with the Common Stock (such as the convertible Preferred Stock) are considered in the computation of basic income per share using the two-class method. However, in periods of net loss, such participating securities are not included since the holders of such securities do not have a contractual obligation to share the losses of the Company.
In computing, diluted income per share, basic earnings per share are adjusted to reflect the potential dilution that could occur upon the exercise of options or warrants issued or granted using the “treasury stock method” and upon the conversion of Preferred Stock using the "if-converted method", if the effect of each of such financial instruments is dilutive.
|
P.
|
Stock-based compensation
|
The Group measures and recognizes the compensation expense for all equity-based payments to employees based on their estimated fair values in accordance with ASC 718, “Compensation-Stock Compensation”. Share-based payments including grants of stock options are recognized in the statement of operations as an operating expense based on the fair value of the award at the date of grant. The fair value of stock options granted is estimated using the Black-Scholes option-pricing model. The Group has expensed compensation costs, net of estimated forfeitures, applying the accelerated vesting method, over the requisite service period or over the implicit service period when a performance condition affects the vesting, and it is considered probable that the performance condition will be achieved.
Share-based payments awarded to consultants (non-employees) are accounted for in accordance with ASC Topic 505-50, "Equity-Based Payments to Non-Employees".
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 2
|
–
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
Q.
|
Fair value of financial instruments
|
ASC Topic 825-10, "Financial Instruments" defines financial instruments and requires disclosure of the fair value of financial instruments held by the Group. The Group considers the carrying amount of cash and cash equivalents, restricted cash, accounts receivable, other current assets, accounts payable, current portion of long-term loans from stockholders and other current liabilities balances, to approximate their fair values due to the short-term maturities of such financial instruments. The Warrants with down-round protection represent a derivative liability and therefore are measured and presented on the balance sheet at fair value. ASC Topic 825-10, establishes the following fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2 - Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3 - Unobservable inputs are used when little or no market data is available. Level 3 inputs are considered as the lowest priority under the fair value hierarchy.
The fair value measurement of the warrants is classified as level 3. The Group did not estimate the fair value of the long-term loans from stockholders since their repayment schedule has not yet been determined.
|
R.
|
Concentrations of credit risk
|
Financial instruments that potentially subject the Group to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash and accounts receivable. Cash and cash equivalents and restricted cash are deposited with major banks in Israel and the United States of America. Management believes that such financial institutions are financially sound and, accordingly, minimal credit risk exists with respect to these financial instruments. As of December 31, 2017, and 2016 the balances of accounts receivable was not material and accordingly such balances do not represent substantial concentration of credit risk. The Group does not have any significant off-balance-sheet concentration of credit risk, such as foreign exchange contracts, option contracts or other foreign hedging arrangements.
The Group records accruals for loss contingencies arising from claims, litigation and other sources when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. Legal costs incurred in connection with loss contingencies are expensed as incurred.
T.
Preferred Stock
|
1.
|
Temporary Equity Classification
|
As more fully described in Note 10 the Company issued Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
,
, which provide a liquidation preference and certain redemption rights for the benefit of the holders of such Preferred Stock upon the occurrence of certain contingent events, some of which are not solely within the Company’s control. Accordingly, the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock are presented as temporary equity.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 2
|
–
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
T.
Preferred Stock (cont.)
Upon initial recognition, the Series A Preferred Stock issued together with detachable Series A Warrants (originally classified as a derivative liability) were measured based on the "residual approach" and were presented net of the direct issuance expenses that were allocated to them. Upon initial recognition, the Series B Preferred Stock issued together with the detachable Series B Warrants (classified as equity) were measured based on the relative fair value basis and were presented net of the direct issuance expenses that were allocated to them. Upon initial recognition, the Series C Preferred Stock issued together with detachable Series C Warrants (classified as equity) were measured based on the relative fair value basis and were presented net of the direct issuance expenses that were allocated to them.
|
3.
|
Subsequent Measurement
|
On each balance sheet date, the Company’s management assesses the probability of redemption of the Preferred Stock Series A, B or C. In the event that management determines such redemption to be probable as of an applicable balance sheet date, the Company will reclassify the outstanding balance of the Preferred Stock as of that date as a liability and the difference between such amount and the aggregate redemption price of the Preferred Stock will be accreted against accumulated deficit over the period beginning on the date that it becomes probable that the Preferred Stock will become redeemable and ending on the earliest redemption date.
As of December 31, 2017
,
the redemption of the
preferred
stock series was not considered probable.
|
4.
|
Conversion Feature Analysis
|
The Company has determined that due to the economic characteristics and risks of the Preferred Stock, based on their stated or implied substantive terms and features, Series A, Series B and Series C Preferred Stock, are considered as more akin to equity than debt. Accordingly, it was determined that the economic characteristics and the risks of the embedded conversion option to Common Stock and those of the Preferred Stock themselves (the 'host contract') are clearly and closely related. As a result, the embedded conversion feature was not required to be bifurcated. Also, since at the respective issuance dates of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock, the effective exercise price of the conversion feature (based on the effective conversion rate of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock into Common Stock) was higher than the estimated fair value of the Company’s Common Stock, it was determined that the conversion feature was not beneficial.
|
5.
|
Modifications or Exchanges
|
Modifications to, or exchanges of, the Preferred Stock are accounted for as a modification or an extinguishment. Such an assessment is done by management either qualitatively or quantitatively based on the facts and circumstances of each transaction. A qualitative assessment is generally appropriate when the changes to a Preferred Stock instrument are either so inconsequential or is very significant, otherwise, a quantitative test is also applied. Since the periodic contractual cash flows of the Preferred Stock are not defined, the quantitative test is generally applied using the fair value model. Under the fair value model, the Company compares the fair value of the Preferred Stock immediately before and after the modification or exchange. If the fair values before and after the modification or exchange are substantially different, the modification or exchange is accounted for as an extinguishment, otherwise it is accounted for as a modification. During 2017 and 2016 there were no exchange or modifications of preferred stock.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 2
|
–
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
U.
Series A Warrants with Down-Round Protection
The Company considered the provisions of ASC 815-40, “Derivatives and Hedging: Contracts in Entity’s Own Equity”, with respect to the detachable Warrants that were issued to the Series A Unit Purchasers and to the placement agent, as described in Note 10D, and determined that as a result of the “down-round” protection that would adjust the number of Warrants and the exercise price of the Warrants based on the price at which the Company subsequently issues shares or other equity-linked financial instruments, if that price is less than the original exercise price of the Warrants, such Warrants cannot be considered as indexed to the Company's own stock. Accordingly, the Warrants were recognized as derivative liability at their fair value on initial recognition. In subsequent periods, the Warrants are marked to market with the changes in fair value recognized as financing expense or income in the consolidated statement of operations. The direct issuance expenses that were allocated to the detachable Warrants were expensed as incurred.
|
V.
|
Recently Issued Accounting Pronouncements
|
|
1.
|
Accounting Standard Update 2014-09, “Revenue from Contracts with Customers”
|
In May 2014, the FASB issued Accounting Standard Update 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09").
ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires entities to disclose sufficient information, both quantitative and qualitative, to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
An entity should apply the amendments in ASU 2014-09 using one of the following two methods: 1. Retrospectively to each prior reporting period presented with a possibility to elect certain practical expedients, or, 2. Retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If an entity elects the latter transition method, it also should provide certain additional disclosures.
During 2016, the FASB issued several Accounting Standard Updates (“ASUs”) that focus on certain implementation issues of the new revenue recognition guidance including Narrow-Scope Improvements, Practical Expedients and technical corrections.
In accordance with an amendment to ASU 2014-09, introduced by Accounting Standard 2015-14, “Revenue from contracts with Customers – Deferral of the Effective Date”, for a public entity, the amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period (the first quarter of fiscal year 2018 for the Company). Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
The Company intends to adopt ASU 2014-09 as of January 1, 2018.
The Company evaluated the impact of ASU 2014-09 on its revenue streams and selling contracts, if any, and on its financial reporting and disclosures, business processes, controls and systems.
Since the company did not report significant revenues, management believes that the adoption of ASU 2014-09 will not have a significant impact on its consolidated financial statements.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 2
|
–
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
V.
|
Recently Issued Accounting Pronouncements (cont.)
|
|
2.
|
Accounting Standard Update 2015-11, “Simplifying the Measurement of Inventory”
|
Effective January 1, 2017, the Group adopted ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330) (“ASU 2015- 11”).
ASU 2015-11 outlines that inventory within the scope of its guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out (LIFO) and the retail inventory method (RIM) are not impacted by the new guidance. Prior to the issuance of ASU 2015-11, inventory was measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin).
The adoption of ASU 2015-11 did not have a significant effect on the consolidated financial statements.
|
3.
|
Accounting Standard Update (ASU) No. 2017-11, “
Earnings Per Share”
|
In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”).
Among others, Part I of ASU 2017-11 simplifies the accounting for certain financial instruments with down round features, which is a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings. Current accounting guidance creates cost and complexity for organizations that issue financial instruments with down round features by requiring, on an ongoing basis, fair value measurement of the entire instrument or conversion option.
ASU 2017-11 require companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when triggered (i.e., when the exercise price of the related equity-linked financial instrument is adjusted downward because of the down round feature) and will also recognize the effect of the trigger within equity.
ASU 2017-11 also addresses navigational concerns within the FASB Accounting Standards Codification related to an indefinite deferral available to private companies.
The provisions of the new ASU related to down rounds are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (fiscal 2019 for the Company). Early adoption is permitted for all entities.
The Company is evaluating the impact of ASU 2017-11 on its financial statements. Although this process has not been completed, managements believes that its provisions might impact the accounting of the financial instruments issued by the Company that include down-round protection.
|
W.
|
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications did not have significant effect on the reported results of operations, shareholder’s deficit or cash flows.
|
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
|
|
US dollars
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
12,734
|
|
|
|
735,201
|
|
Work in process
|
|
|
1,556,256
|
|
|
|
633,132
|
|
Finished products
|
|
|
144,493
|
|
|
|
51,271
|
|
|
|
|
1,713,483
|
|
|
|
1,419,604
|
|
Less – provision for slow moving inventory
|
|
|
(756,134
|
)
|
|
|
-
|
|
|
|
|
957,349
|
|
|
|
1,419,604
|
|
NOTE 4
|
–
|
OTHER CURRENT ASSETS
|
|
|
US dollars
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
30,319
|
|
|
|
90,563
|
|
Government Institution (*)
|
|
|
63,818
|
|
|
|
266,431
|
|
|
|
|
94,137
|
|
|
|
356,994
|
|
|
(*)
|
Represents amounts advanced by Integrity Israel to the Israeli tax authorities or amounts owed to Integrity Israel by the Israeli Value Added Tax authorities.
|
NOTE 5
|
–
|
PROPERTY AND EQUIPMENT, NET
|
|
|
US dollars
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Computers
|
|
|
324,690
|
|
|
|
274,693
|
|
Furniture and office equipment
|
|
|
263,106
|
|
|
|
237,240
|
|
Leasehold improvements
|
|
|
49,558
|
|
|
|
44,686
|
|
|
|
|
637,354
|
|
|
|
556,619
|
|
Less – accumulated depreciation
|
|
|
(420,608
|
)
|
|
|
(316,167
|
)
|
|
|
|
216,746
|
|
|
|
240,452
|
|
During the years ended December 31, 2017, 2016 and 2015, depreciation expenses amounted to $67,878, $59,584 and $44,891, respectively, and new equipment purchases amounted to $19,467, $76,455 and $143,736, respectively.
NOTE 6
|
–
|
OTHER CURRENT LIABILITIES
|
|
|
US dollars
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Employees and related institutions
|
|
|
336,783
|
|
|
|
363,738
|
|
Accrued expenses and other
|
|
|
929,171
|
|
|
|
349,811
|
|
|
|
|
1,265,954
|
|
|
|
713,549
|
|
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
As of December 31, 2017, the Group had an unutilized credit line of approximately $43,265 (NIS 150,000) with its Israeli bank. Borrowings under the line of credit are secured by funds on deposit with the bank at the time of borrowing, which generally must be sufficient to cover the principal amount of the borrowings in full.
NOTE 8
|
–
|
LONG-TERM LOANS FROM STOCKHOLDERS
|
During the years 2003-2004, Integrity Israel received loans from stockholders (four separate lenders). The loans are indexed to the Israeli Consumer Price Index from their origination date and bear no interest.
The Group will be required to pay the loans, in quarterly installments, commencing on the first quarter following the first fiscal year in which the Group reports net profit in its annual report. At such time, the Group will be required to make quarterly payments equal to 10% of its total sales for each quarter until the loans have been repaid in full. Notwithstanding the repayment mechanism, the Group will not be required to repay the loans during any period in which such payment would cause a deficit in the Group's working capital.
From June of 2011 Integrity Israel, Avner Gal, David Malka, Zvi Cohen, Ilana Freger and Alexander Raykhman, on the one hand, and Dimri, on the other hand, which was a shareholder of Integrity Israel prior to the reorganization and merger (See Note 1A above), were involved in arbitration proceedings resulting from certain claims asserted by Dimri following such reorganization. Pursuant to the terms of the Arbitration Decision, (1) Avner Gal, David Malka, Zvi Cohen, Ilana Freger and Alexander Raykhman transferred to Dimri, on March 18, 2015, an aggregate of 440,652 shares of the Company’s outstanding Common Stock held collectively by such shareholders, (2) Integrity Israel (A) paid to Dimri on March 23, 2015, NIS 1,767,674 or $439,939 (based on the exchange rate of 4.018 NIS:$1 as of March 23, 2015), as repayment in full of the outstanding principal amount under Dimri’s investment agreement with Integrity Israel and the founders (the “Investment Agreement”), as adjusted for changes in the Israeli consumer price index since the date on which the loan was made, and (B) paid to Dimri on April 30, 2015, NIS 316,100 or $81,870 (based on the exchange rate of 3.861 NIS:$1 as of April 30, 2015), as partial reimbursement of Dimri’s attorney’s fees in the arbitration. The Company accrued for the fee reimbursement obligation as part of professional fees within selling, marketing and general and administrative expenses included in its results of operations for the fiscal year ended December 31, 2014. During March 2015, such amount was fully paid.
As of December 31, 2017, the Group does not expect to make any additional material repayments during the following 12-month period, if any, and accordingly the entire balance of the loans from stockholders have been presented as long-term liabilities.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 9
|
–
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
|
A.
|
On March 4, 2004, the OCS provided Integrity Israel with a grant of approximately $93,300 (NIS 420,000), for its plan to develop a non-invasive blood glucose monitor (the “Development Plan”). Integrity Israel is required to pay royalties to the OCS at a rate ranging between 3-5% of the proceeds from the sale of the Group's products arising from the Development Plan up to an amount equal to $93,300, plus interest at LIBOR from the date of grant. As of December 31, 2017, the remaining contingent liability with respect to royalty payment on future sales equals approximately $36,083, excluding interest. Such contingent obligation has no expiration date.
|
As of December 31, 2017, 2016 and 2015, the Group accrued royalties to the OCS in the amounts of $13,907, $14,011 and $8,167, respectively.
|
B.
|
Until mid of December 2015, Integrity Israel leased approximately 3,100 sq. ft. of office space in the city of Ashkelon, Israel as its principal offices and prototype laboratory. Pursuant to a verbal agreement with the landlord, Integrity Israel leased this facility on a monthly basis at a cost of approximately $2,934 (NIS 11,500). Currently, Integrity Israel leases approximately 5,500 sq. ft. of office space in the city of Ashdod, Israel for its principal offices. The lease term began on December 1, 2015 for a period of 5 years which can be extended for an additional 5 years at the option of the Company. Monthly lease payments including maintenance approximate $10,000. The Company estimates that its minimal rent and maintenance payments will approximate $120,000 per year over each of the next 5 years. In connection with the lease agreement, Integrity Israel provided the landlord a bank guarantee in the amount of approximately $39,562 (NIS 137,162) that can be exercised by the landlord in the case Integrity Israel fails to pay the monthly rent payments. The guarantee is renewed on an annual basis for a period of 4 years and is secured by funds on deposit with the bank, which generally must be sufficient to cover the principal amount guarantee.
|
|
C.
|
During February 2016, the Company entered into an Advisory Agreement with AGI, pursuant to which the Company retained AGI on a non-exclusive basis to provide certain advisory services to the Company. As consideration for such services, the Company extended through December 31, 2019, the expiration date of 422,077 warrants issued to AGI and/or its designees in connection with the Company’s
common stock
offering completed in
2010 and the Series A Unit offering completed in 2012. The Advisory Agreement had an initial term of six months
, subject to automatic renewal
for additional 30 day terms unless terminated by either party with 30 days written notice. In April 2016, the Company and AGI amended again that Advisory Agreement to extend the term of the Advisory Agreement for an additional six months until March of 2017. In consideration for such extension, the Company agreed to modify the terms of the 439,674 warrants issued to AGI and/or its designees in connection with the Series B Unit offering to include full-ratchet anti-dilution protection. As a result of the two agreements the Company recorded in its statement of operations for the year ended December 31, 2016, a one-time charge in the amount of $211,077 representing the incremental fair market value adjustments in respect of the above modified warrants issued to the placement agent. Such incremental fair market value adjustments represent the increase in the fair value of the warrants resulting from the above modifications and were recorded against stockholders’ deficit. In addition, as a result of the inclusion of anti-dilution protection, the Company classified $341,662, representing the fair market value at March 2016 of the above 439,674 warrants issued to AGI (after the above modification) out of stockholders’ deficit and presented them as Warrants with down round protection within long-term liabilities
.
|
On August 1, 2017 the Company entered into an Advisory Agreement with AGI, pursuant to which the Company retained AGI on a non-exclusive basis to provide certain advisory services to the Company for a period of 9 months.
As consideration for the Advisory Services, the Company shall pay Advisor $20,000 per month
(the “Monthly Fees”),
payable in a Cash payment of $10,000
(the “Cash Fee”),
and the balance in shares of the Company’s Common Stock valued at $4.50 per share (2,223 shares per month
) (the “Stock Fee”).
In addition, in compensation for the Advisory Services provided in June and July, the Company shall upon execution of this Agreement, issue to Advisor 8,889 shares of Common Stock.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 9
|
–
|
COMMITMENTS AND CONTINGENT LIABILITIES (cont.)
|
The Company paid the Placement Agent $955,167, $1,014,974 and $185,000, in cash during 2017, 2016, and 2015, respectively in connection with the above advisory service agreements and the offerings. See Notes 10B
, Note 10C
, Note 10D and Note 10E.1 with respect to warrants issued to the Placement Agent.
NOTE 10
|
–
|
COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION
|
|
A.
|
1.
|
Description of the rights attached to the Common Stock
|
Each share of Common Stock entitles the holder to one vote, either in person or by proxy, on each matter submitted to the approval of the Company’s stockholders. The holders of Common Stock are not permitted to vote their shares cumulatively. As described below, holders of Preferred Stock are entitled to vote together with the holders of Common Stock on an as-converted basis. Accordingly, the holders of the Company's Common Stock together with the holders of the Preferred Stock who hold, in the aggregate, more than fifty percent of the total voting rights can elect all of the directors and, in such event, the holders of the remaining shares will not be able to elect any of such directors. The vote of the holders of a majority of the issued and outstanding shares of Common Stock, voting together with the holders of the Preferred Stock on an as converted basis, are entitled to vote thereon is sufficient to authorize, affirm, ratify or consent to any act or action submitted to the vote of the Company’s stockholders, except as otherwise provided by law.
|
2
.
|
Description of the rights attached to the Series A Preferred Stock
Holders of Series A Preferred Stock are entitled to receive cumulative dividends at a rate of 5% per annum, based on the stated value per share of the Series A Preferred Stock, which was initially $1,000 per share. Dividends on the Series A Preferred Stock are payable quarterly on March 31, June 30, September 30 and December 31 of each year, beginning on March 31, 2013, and on each conversion date (with respect to the shares of Series A Preferred Stock being converted). Until September 13, 2013, dividends were payable only in cash. Thereafter, dividends on the Series A Preferred Stock became payable, at the option of the Company, in cash and/or, if certain conditions are satisfied (including, among others, that the volume weighted average trading price for the Common Stock on its principal trading market is equal to or greater than 110% of the then current conversion price for the Series A Preferred Stock for five consecutive trading days prior to the dividend payment date), in shares of Common Stock, valued at the then current conversion price of the Series A Preferred Stock. The Company will incur a late fee of 9% per annum, payable in cash, on dividends that are not paid within three trading days of the applicable dividend payment date. During the years ended December 31, 2017, 2016 and 2015 the Company paid an aggregate of $5,731 $13,529 and $57,
061and
accrued a cash dividend in the amount of $9,400 $4,700 and 0$, respectively, in cash dividends to its Series A Preferred Stockholders.
|
The Company may become obligated to redeem the Series A Preferred Stock in cash upon the occurrence of certain triggering events, including, among others, a material breach by the Company of certain contractual obligations to the holders of the Series A Preferred Stock, the occurrence of a change in control of the Company, the occurrence of certain insolvency events relating to the Company, or the failure of the Common Stock to continue to be listed or quoted for trading on one or more specified United States securities exchanges or a regulated quotation service. In addition, upon the occurrence of certain triggering events, each holder of Series A Preferred Stock will have the option to require the Company to redeem such holder’s shares of Series A Preferred Stock for a redemption price payable in shares of Common Stock or receive an increased dividend rate of 9% on all of such holder’s outstanding Series A Preferred Stock.
Subject to certain conditions, the Company will have the option to force the conversion of the Series A Preferred Stock (in whole or in part) if the volume weighted average price for the Common Stock on its principal trading market exceeds $11.60 for each of any 20 trading days during any 30 consecutive Trading Day period and the average daily dollar trading value for the Common Stock during such 30 day period exceeds $100,000.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 10
|
–
|
COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.)
|
|
A.
|
2
.
|
Description of the rights attached to the Series A Preferred Stock (cont.)
|
If the Company fails to timely deliver certificates for shares of Common Stock issuable upon conversion of the Series A Preferred Stock (the “Series A Conversion Shares”) and, as a result, the holder is required by its brokerage firm to purchase shares of Common Stock to deliver in satisfaction of a sale by such holder of the Series A Conversion Shares (a “Buy-In”), the Company will be required to: (a) pay the converting holder in cash an amount equal to the amount, if any, by which such holder’s total purchase price (including any brokerage commissions) for the shares of Common Stock so purchased exceeds the product of (i) the aggregate number of Series A Conversion Shares due to the holder, multiplied by (ii) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions); and (b) at the option of such holder, either reissue (if surrendered) the shares of Series A Preferred Stock equal to the number of shares of Series A Preferred Stock submitted for conversion (in which case, such conversion will be deemed rescinded) or deliver to such holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements.
In addition, the Company will be required to pay partial liquidated damages of $10 for each $1,000 of stated value of any shares of Series A Preferred Stock which have been converted by a holder and in respect of which the Company fails to deliver Series A Conversion Shares by the eighth trading day following the applicable conversion date.
Subject to the beneficial ownership limitation described below, holders of Series A Preferred Stock will vote together with the holders of Common Stock on an as-converted basis. Holders will not be permitted to convert their Series A Preferred Stock if such conversion would cause such holder to beneficially own more than 4.99% of the outstanding number of shares of Common Stock outstanding after giving effect to such conversion (subject to increase to 9.99%, at the option of the holder, upon no less than 61 days prior written notice to the Company) (the “Beneficial Ownership Limitation”). In addition, no holder may vote any shares of Series A Preferred Stock (on an as converted to Common Stock basis) in excess of the Beneficial Ownership Limitation.
Subject to certain limitations, so long as any initial Series A Unit purchaser holds any shares of Series A Preferred Stock, if (1) the Company sells any shares of Common Stock or other securities convertible into, or rights to acquire, Common Stock and (2) a Purchaser then holding Series A Preferred Stock, Warrants, Conversion Shares or Warrant Shares (defined below) reasonably believes that any of the terms and conditions appurtenant to such issuance or sale are more favorable to the purchaser in such subsequent sale of securities than are the terms and conditions granted to such
purchaser
, then the
purchaser
will be permitted to require the Company to amend the terms of this transaction (only with respect to such
purchaser
) so as to match the terms of the subsequent issuance (including, for the avoidance of doubt, any terms and provisions that are or may be less favorable to such
purchaser
).
The conversion price of the shares of Series A Preferred Stock that were included in the Series A Units is subject to adjustment for certain issuances of Common Stock or other securities of the Company at an effective price per share that is lower than the conversion price then in effect ($4.50 per share at December 31, 2017 and 2016, respectively), as well as for stock splits, stock dividends, combinations of shares, similar recapitalization transactions and certain pro-rata distributions to common stockholders.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 10
|
–
|
COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.)
|
|
A.
|
3
.
|
Description of the rights attached to the Series B Preferred Stock
|
Holders of Series B Preferred Stock are entitled to receive cumulative dividends at a rate of 5.5% per annum, based on the stated value per share of Series B Preferred Stock. Dividends on the Series B Preferred Stock are payable quarterly on March 31, June 30, September 30 and December 31 of each year, beginning on September 30, 2014, and on each conversion date (with respect to the shares of Series B Preferred Stock being converted). For so long as required under the terms of the Certificate of Designations for the Company’s outstanding Series A Preferred Stock, dividends on Series B Preferred Stock will be payable only in shares of Common Stock. Thereafter, dividends on the Series B Preferred Stock will be payable, at the option of the Company, in cash and/or, if certain conditions are satisfied, shares of Common Stock or a combination of both. Shares of Common Stock issued as payment of dividends will be valued at the lower of (a) the then current conversion price of the Series B Preferred Stock or (b) the average of the volume weighted average price for the Common Stock on the principal trading market therefor for the 10 trading days immediately prior to the applicable dividend payment date. The Company will incur a late fee of 9% per annum, payable in cash, on dividends that are not paid within three trading days of the applicable dividend payment date. During the years ended December 31, 2017, 2016, and 2015 the Company issued a total of 359,505, 272,282 and 168,926 shares of Common Stock, respectively at an estimated fair value of $854,647, $647,215 and $390,219, respectively as in kind dividends to holders of Series B Preferred Stock.
Subject to certain ownership limitations described below, the Series B Preferred Stock is convertible at the option of the holder at any time and from time to time into shares of Common Stock at a conversion price of $4.5 per share (the original conversion price was $5.8 per share, during 2016 the conversion price was decrease to $4.5 per share as a result of the issuance of series C) (calculated by dividing the stated value per share of Series B Preferred Stock, which is initially $1,000, by the conversion price per share). The conversion price of the Series B Preferred Stock is subject to adjustment for certain issuances of Common Stock or other securities of the Company at an effective price per share that is lower than the conversion price then in effect, as well as for stock splits, stock dividends, combinations of shares, similar recapitalization transactions and certain pro-rata distributions to common stockholders. In addition, the holders of Series B Preferred Stock will be entitled to receive any securities or rights to acquire securities or property granted or issued by the Company pro rata to the holders of Common Stock to the same extent as if such holders of Series B Preferred Stock had converted all of their shares of Series B Preferred Stock prior to such distribution. In the event of a fundamental transaction, such as a merger, consolidation, sale of substantially all assets and similar reorganizations or recapitalizations of the Company, the holders of Series B Preferred Stock will be entitled to receive, upon conversion of their shares of Series B Preferred Stock, any securities or other consideration received by the holders of the Common Stock pursuant to the fundamental transaction.
Subject to certain conditions contained in the Certificate of Designations, Preferences and Rights relating to the Series B Preferred Stock, the Company will have the option to force the conversion of the Series B Preferred Stock (in whole or in part) if (a) the volume weighted average price for the Common Stock on its principal trading market exceeds $10.00 for each of any 20 trading days during any 30 consecutive Trading Day period and the average daily dollar trading value for the Common Stock during such 30 day period exceeds $50,000 or (b) the Company receives approval to list the Common Stock on a national securities exchange.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 10
|
–
|
COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.)
|
|
A.
|
3
.
|
Description of the rights attached to the Series B Preferred Stock (cont.)
|
If the Company fails to timely deliver certificates for shares of Common Stock issuable upon conversion of the Series B Preferred Stock (the “Series B Conversion Shares”) which results in a Buy-In, the Company will be required to: (a) pay the converting holder in cash an amount equal to the amount, if any, by which such holder’s total purchase price (including any brokerage commissions) for the shares of Common Stock so purchased exceeds the product of (i) the aggregate number of Series B Conversion Shares due to the holder, multiplied by (ii) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions); and (b) at the option of such holder, either reissue (if surrendered) the shares of Series B Preferred Stock equal to the number of shares of Series B Preferred Stock submitted for conversion (in which case, such conversion will be deemed rescinded) or deliver to such holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements.
In addition, the Company will be required to pay partial liquidated damages of $10 for each $1,000 of stated value of any shares of Series B Preferred Stock which have been converted by a holder and in respect of which the Company fails to deliver Series B Conversion Shares by the eighth trading day following the applicable conversion date.
As long as at least 35% of the originally issued shares of Series B Preferred Stock are outstanding, without the written consent of the holders of a majority in stated value of the outstanding Preferred Stock, the Company will not be permitted to, among other things, incur indebtedness or liens not permitted under the Certificate of Designations for the Series B Preferred Stock; repay, repurchase, pay dividends on or otherwise make distributions in respect of any shares of Common Stock or other securities junior to the Series B Preferred Stock; or enter into certain transactions with affiliates of the Company.
Subject to any limitations under the terms of the Certificate of Designations for the Company’s outstanding Series A Preferred Stock, the Company may become obligated to redeem the Series B Preferred Stock in cash upon the occurrence of certain triggering events, including, among others, a material breach by the Company of certain contractual obligations to the holders of the Series B Preferred Stock, the occurrence of a change in control of the Company, the occurrence of certain insolvency events relating to the Company, or the failure of the Common Stock to continue to be listed or quoted for trading on one or more specified United States securities exchanges or a regulated quotation service. In addition, upon the occurrence of certain triggering events, each holder of Series B Preferred Stock will have the option to require the Company to redeem such holder’s shares of Series B Preferred Stock for a redemption price payable in shares of Common Stock or receive an increased dividend rate of 9% on all of such holder’s outstanding Series B Preferred Stock.
Subject to the Beneficial Ownership Limitation, holders of Series B Preferred Stock will vote together with the holders of Common Stock and Series A Preferred Stock on an as-converted basis. Holders will not be permitted to convert their Series B Preferred Stock if such conversion would cause such holder to beneficially own shares of outstanding Common Stock in excess of the Beneficial Ownership Limitation.
Subject to certain limitations, so long as any
Purchaser
holds any shares of Series B Preferred Stock, if (a) the Company sells any shares of Common Stock or other securities convertible into, or rights to acquire, Common Stock and (b) a
Purchaser
then holding Series B Preferred Stock, Series B Warrants, Conversion Shares or Warrant Shares (defined below) reasonably believes that any of the terms and conditions appurtenant to such issuance or sale are more favorable to the purchaser in such subsequent sale of securities than are the terms and conditions granted to such
Purchaser
, then the
Purchaser
will be permitted to require the Company to amend the terms of this transaction (only with respect to such
Purchaser
) so as to match the terms of the subsequent issuance (including, for the avoidance of doubt, any terms and provisions that are or may be less favorable to such
Purchaser
).
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 10
|
–
|
COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.)
|
|
A.
|
4
.
|
Description of the rights attached to the Series C Preferred Stock
|
Holders of Series C Preferred Stock are entitled to receive cumulative dividends at a rate of 5.5% per annum, based on the stated value per share of Series C Preferred Stock. Dividends on the Series C Preferred Stock are payable quarterly on March 31, June 30, September 30 and December 31 of each year, beginning on June 30, 2016, and on each conversion date (with respect to the shares of Preferred Stock being converted). For so long as required under the terms of the Certificate of Designations for the Company’s outstanding Series A Preferred Stock or Series B Preferred Stock, dividends will be payable only in shares of Common Stock. Thereafter, dividends on the Series C Preferred Stock will be payable, at the option of the Company, in cash and/or, if certain conditions are satisfied, shares of Common Stock or a combination of both. Shares of Common Stock issued as payment of dividends will be valued at the lower of (a) the then current conversion price of the Series C Preferred Stock or (b) the average of the volume weighted average price for the Common Stock on the principal trading market therefor for the 10 trading days immediately prior to the applicable dividend payment date. The Company will incur a late fee of 9% per annum, payable in cash, on dividends that are not paid within three trading days of the applicable dividend payment date. During the years ended December 31, 2017, and 2016, the Company issued a total of 237,169 and 64,148 shares of Common Stock, respectively at an estimated fair value of $566,033 and $152,480, as in kind dividends to holders of Series C Preferred Stock
The Series C
units
, each consisting of (i) one share of our newly designated Series C 5.5% Convertible Preferred Stock, par value $0.001 per share are convertible into shares of our
common stock, par value $0.001 per share
, at an initial conversion price of $4.50 per share, (ii) a five year warrant to purchase, at an exercise price of $4.50 per share, up to such number of shares of our
common stock
issuable upon conversion of such share of Series C Preferred Stock (each a “Series C-1 Warrant”) and (iii) a five year warrant to purchase, at an exercise price of $7.75 per share, up to such number of shares of our
common stock
issuable upon conversion of such share of Series C Preferred Stock (each a “Series C-2 Warrant” and, together with the Series C-1 Warrants, collectively, the “Series C Warrants”).
Subject to any limitations under the terms of the Certificate of Designations for the Company’s outstanding Series A Preferred Stock or Series B Preferred Stock, the Company may become obligated to redeem the Series C Preferred Stock in cash upon the occurrence of certain triggering events, including, among others, a material breach by the Company of certain contractual obligations to the holders of the Series C Preferred Stock, the occurrence of a change in control of the Company, the occurrence of certain insolvency events relating to the Company, or the failure of the Common Stock to continue to be listed or quoted for trading on one or more specified United States securities exchanges or a regulated quotation service. In addition, upon the occurrence of certain triggering events, each holder of Series C Preferred Stock will have the option to require the Company to redeem such holder’s shares of Preferred Stock for a redemption price payable in shares of Common Stock or receive an increased dividend rate of 9% on all of such holder’s outstanding Series C Preferred Stock.
Subject to certain conditions contained in the Certificate of Designations, Preferences and Rights relating to the Series C Preferred Stock (the “Certificate of Designations”), the Company will have the option to force the conversion of the Series C Preferred Stock (in whole or in part) if (a) the volume weighted average price for the Common Stock on its principal trading market exceeds $7.00 for each of any 20 trading days during any 30 consecutive trading day period and the average daily dollar trading value for the Common Stock during such 30 day period exceeds $50,000 or (b) the Company receives approval to list the Common Stock on a national securities exchange.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 10
|
–
|
COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.)
|
|
A.
|
4
.
|
Description of the rights attached to the Series C Preferred Stock (cont.)
|
Subject to certain exceptions contained in the Certificate of Designations, if the Company fails to timely deliver certificates for shares of Common Stock issuable upon conversion of the Series C Preferred Stock (the “Conversion Shares”) and, as a result, the holder is required by its brokerage firm to purchase shares of Common Stock to deliver in satisfaction of a sale by such holder of the Conversion Shares (a “Buy-In”), the Company will be required to: (a) pay the converting holder in cash an amount equal to the amount, if any, by which such holder’s total purchase price (including any brokerage commissions) for the shares of Common Stock so purchased exceeds the product of (i) the aggregate number of Conversion Shares due to the holder, multiplied by (ii) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions); and (b) at the option of such holder, either reissue (if surrendered) the shares of Series C Preferred Stock equal to the number of shares of Series C Preferred Stock submitted for conversion (in which case, such conversion will be deemed rescinded) or deliver to such holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements. In addition, the Company will be required to pay partial liquidated damages of $10 for each $1,000 of stated value of any shares of Series C Preferred Stock which have been converted by a holder and in respect of which the Company fails to deliver Conversion Shares by the fifth trading day following the applicable conversion date and the Company will continue to pay such partial liquidated damages for each trading day after such eighth trading day until such certificates are delivered or the holder rescinds such conversion.
As long as at least 35% of the originally issued shares of Series C Preferred Stock are outstanding, without the written consent of the holders of a majority in stated value of the outstanding Series C Preferred Stock, the Company will not be permitted to, among other things, incur indebtedness or liens not permitted under the Certificate of Designations; repay, repurchase, pay dividends on or otherwise make distributions in respect of any shares of Common Stock or other securities junior to the Series C Preferred Stock; enter into certain transactions with affiliates of the Company; or enter into any agreement with respect to the foregoing.
Subject to the beneficial ownership limitation described below, holders of Series C Preferred Stock will vote together with the holders of Common Stock, Series A Preferred Stock and Series B Preferred Stock on an as-converted basis. Holders will not be permitted to convert their Series C Preferred Stock if such conversion would cause such holder to beneficially own more than 4.99% of the outstanding Common Stock (subject to increase to 9.99%, at the option of the holder, upon no less than 61 days prior written notice to the Company) (the “Beneficial Ownership Limitation”). In addition, no holder may vote any shares of Series C Preferred Stock (on an as-converted to Common Stock basis) in excess of the Beneficial Ownership Limitation.
Subject to certain limitations, so long as any purchaser holds any shares of Series C Preferred Stock, if (a) the Company sells any shares of Common Stock or other securities convertible into, or rights to acquire, Common Stock and (b) a purchaser then holding Series C Preferred Stock, Warrants, Conversion Shares or Warrant Shares (defined below) reasonably believes that any of the terms and conditions appurtenant to such issuance or sale are more favorable to the purchaser in such subsequent sale of securities than are the terms and conditions granted to such purchaser after taking into account all of the terms and conditions of the terms granted to the purchasers under the purchase agreement and the terms granted in such subsequent issuance or sale, including all of the components of the Series C Units and of the securities or units involved in such subsequent issuance or sale, then the purchaser will be permitted to require the Company to amend the terms of this transaction (only with respect to such purchaser) so as to match the terms of the subsequent issuance (including, for the avoidance of doubt, any terms and provisions that are or may be less favorable to such purchaser).
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 10
|
–
|
COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.)
|
|
A.
|
5
.
|
Description of the rights attached to the Series D units
|
Holders of the Series D Units of the Company
(each a “Unit” and, collectively, the “Units”),
each consisting of (a) one share (collectively, the “Shares”) of the Company’s
common stock, par value $0.001 per share (the “
Common Stock
”),
(b) a five year warrant to purchase, at an exercise price of $4.50 per share, one share of Common Stock (collectively, the “Series D-1
Warrants”), (c) a five year warrant to purchase, at an exercise price of $5.75 per share, one share of Common Stock (collectively, the “Series D-2 Warrants”), and (d) a five year warrant to purchase, at an exercise price of $7.75 per share, one share of Common Stock (collectively, the “Series D-3 Warrants”, and together with the Series D-1 Warrants and Series D‑2 Warrants, the “Warrants”).
Warrants
The Warrants have a five-year term. Until the end of the term, the Warrants will be exercisable at any time and from time to time.
Subject to the beneficial ownership limitation, holders of the Warrants will not be permitted to exercise their Warrants if such exercise would cause such holder to beneficially own more than 4.99% of the outstanding Common Stock (subject to increase to 9.99%, at the option of the holder, upon no less than 61 days prior written notice to the Company) (the “Beneficial Ownership Limitation”).
If the Company fails to timely deliver certificates for shares of Common Stock issuable upon exercise of the Warrants (the “Warrant Shares”) and, as a result, the holder is required by its brokerage firm to purchase shares of Common Stock to deliver in satisfaction of a sale by such holder of the Warrant Shares (a “Buy-In”), the Company will be required to: (a) pay in cash to the holder the amount, if any, by which (i) the holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (ii) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed; and (b) at the option of such holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations.
Registration Rights
In connection with the sale of the Units which occurred on December 2017, the Company entered into a Registration Rights Agreement with the
Purchasers
(the “Registration Rights Agreement”) pursuant to which, subject to certain exceptions, the Company has agreed to file with the Securities and Exchange Commission, no later than 90 days after the final issuance of Units, a registration statement covering the resale of all of (a) the Shares, (b) the
shares of Common Stock issuable upon exercise of the Warrants in full (the “
Warrant Shares
”);
(c) any additional shares of Common Stock issuable in connection with any anti-dilution provisions in the Warrants; and (d) any securities issued or then issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing. Subject to certain exceptions and limitations specified in the Registration Rights Agreement, the Company will be required to pay each holder monthly partial liquidated damages in the amount of 2% of the aggregate purchase price paid by such holder pursuant to the Purchase Agreement, if the Company fails to timely file a registration statement; timely file a request for acceleration of a registration statement; timely respond to SEC comments with respect to a registration statement; obtain the effectiveness of a registration statement within 120 days from the filing thereof; or maintain the effectiveness of a registration statement for the periods required under the Registration Rights Agreement.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 10
|
–
|
COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.)
|
|
A.
|
5
.
|
Description of the rights attached to the Series D Units (cont.)
|
Placement Agent Compensation
Pursuant to a placement agent agreement (the “Placement Agent Agreement”) with the placement agent for the
Offering
(the “Placement Agent”), at the closing of the sale of the Units the Company paid the Placement Agent, as a commission, a cash amount equal to 7% of the aggregate sales price of the Units, plus 3% of the aggregate sales price as a management fee plus a non-accountable expense allowance equal to 3% of the aggregate sales price of the Units. In addition, pursuant to the placement agent agreement, we are required to issue to the Placement Agent warrants to purchase up to such number of shares of Common Stock equal to 10% of the aggregate Shares sold in the
Offering
plus warrants equal to 10% of the total number of the Warrants issued to the
Purchasers
in the Offering (collectively, the “Placement Agent Warrants”). The terms of the Placement Agent Warrants will be substantially similar to the Warrants except that the Placement Agent Warrants will also be exercisable on a cashless basis and will include full ratchet anti-dilution protection.
Between April 2016 and December 31, 2016, and during the first seven months of 2017, the Company received aggregate net proceeds of approximately $4.9 million and $5.4 million, respectively (net of related cash expenses), from the issuance and sale in a private placement transaction, at a price of $1,000 per unit, of 12,003.80 Series C Units. As of December 31, 2017, the shares of Series C Preferred Stock comprising the Series C Units are convertible into an aggregate of 2,667,539 shares of Common Stock, and the Series C Warrants comprising the Series C Units are exercisable for an aggregate of 5,335,079 shares of Common Stock, in each case subject to adjustment in certain circumstances. The Series C Warrants have a five-year term commencing on their respective issuance dates. Until the end of the applicable term, each Series C Warrant will be exercisable at any time and from time to time at an exercise price of $4.50 per share (with respect to the Series C-1 Warrants) or $7.75 per share (with respect to the Series C-2 Warrants). The Series C Warrants contain adjustment provisions substantially similar to those to the adjustment provisions of the Series C Preferred Stock as described above (See Note 10A.4), except that the Series C Warrants do not include dilution protection for issuances of securities at an effective price per share lower than the conversion price of such Series C Warrants. In addition, the Series C Warrants provide for protection for a Buy-In on substantially the same terms as described above with respect to the Series C Preferred Stock. No holder may exercise its Series C Warrants in excess of the Beneficial Ownership Limitation.
In connection with the 2016 Offering the Company incurred a total of $2,304,714 of issuance costs of which $634,819 attributable to non-cash compensation expenses relating to warrants issued to the Placement Agent (See Notes 9C and Note 10D). The allocation method of the issuance proceeds to the Series C Preferred Stock and to the detachable Series C Warrants and their respective issuance costs is described in Note 2T.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 10
|
–
|
COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.)
|
|
B.
|
The 2016 Offering (cont.)
|
As a result of the initial issuance and sale of the Series C Units, pursuant to the terms of the Series A Warrants, on April 8, 2016, the exercise price per share of the remaining Series A Warrants decreased from $5.80 per share to $4.50 per share and the number of shares of Common Stock issuable upon exercise of each of the Series A Warrants, in the aggregate, increased such that the aggregate exercise price payable thereunder, after taking into account the decrease in the exercise price, will be equal to the aggregate exercise price prior to such adjustment. Also as a result of the initial issuance and sale of the Series C Units, pursuant to the terms of the certificates of designations for the Series A Preferred Stock and Series B Preferred Stock, on April 8, 2016, the conversion price per share of the remaining Series A Preferred Stock and Series B Preferred Stock decreased to $4.50 per share.
Pursuant to the purchase agreements relating to the issuance and sale of the Series A Units and the Series B Units, the Company was required to and did notify the holders of the Series A Preferred Stock and Series B Preferred Stock of the closing of the sale of the Series C Units,
and following receipt thereof such holders of Series A Preferred Stock and Series B Preferred Stock will be entitled, pursuant to the “most favored nation” provisions contained in their respective purchase agreements (as described above), to elect to amend the terms of their Series A Units and Series B Units, respectively, to match the terms of the Series C Units. The Company is obligated to amend the terms of any of Series A Units or Series B Units who timely makes such election and tenders its Series A Units or Series B Units for exchange. As of the issuance of the consolidated financial statements no Series A or Series B Unit holders have elected to utilize such right.
Upon initial recognition, the Series C Preferred Stock issued together with detachable Series C Warrants (classified as equity) were measured based on the relative fair value basis and were presented each net of the direct issuance expenses that were allocated to them (see Note 2T) .
The Company has determined that due to the economic characteristics and risks of the Series C Preferred Stock, based on their stated or implied substantive terms and features, that such Preferred Stock, are considered as more akin to equity than debt. Accordingly, it was determined that the economic characteristics and the risks of the embedded conversion option to Common Stock and those of the Series C Preferred Stock themselves (the 'host contract') are clearly and closely related. As a result, the embedded conversion feature was not required to be bifurcated.
Since at the issuance dates of the Series C Preferred Stock, the exercise price of the conversion feature (based on the effective conversion rate of the Series C Preferred Stock into Common Stock) was higher than the estimated fair value of the Company’s Common Stock, it was determined that the conversion feature was not beneficial. Also, due to the liquidation preference and certain redemption rights for the benefit of the holders of the Series C Preferred Stock, upon the occurrence of the certain contingent events, which are not considered as solely within the Company's control management determined that the Series C Preferred Stock were to be presented as temporary equity. See Note 2T1.
On December 1, 2017, the Company raised $425,000 in gross proceeds from the issuance of one closing totalling 94,444 Series D Units. After giving effect to the payment of commissions to the Placement Agent (See Note 9C) for the offering and the payment of certain offering expenses, the Company received net proceeds from the offering of approximately $377,250 ( due to the fact that $25,000 of the cash issuance expenses was deferred by the placement agent and was paid in March 2018). The Series D Warrants have a five-year term commencing on their respective issuance dates. Until the end of the applicable term, each Series D Warrant will be exercisable at any time and from time to time at an exercise price of $4.50 per share (with respect to the Series D-1 Warrants) or $5.75 per share (with respect to the Series D-2 Warrants) or $7.75 per share (with respect to the Series D-3 Warrants). The Series D Warrants contain adjustment provisions substantially similar to those to the adjustment provisions of the Series C Preferred Stock as described above (See Note 10A.4), except that the Series D Warrants do not include dilution protection for issuances of securities at an effective price per share lower than the conversion price of such Series D Warrants. In addition, the Series D Warrants provide for protection for a Buy-In on substantially the same terms as described above with respect to the Series D Preferred Stock. No holder may exercise its Series D Warrants in excess of the Beneficial Ownership Limitation.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
|
C.
|
The 2017 Offering (cont.)
|
In connection with the 2017 Offering the Company incurred a total of $99,984 of issuance costs of which $27,141 attributable to non-cash compensation expenses relating to warrants issued to the Placement Agent (See Notes 9C and Note 10D). The allocation method of the issuance proceeds to the
Series D
Common Stock and to the detachable Series D Warrants and their respective issuance costs was based on the relative fair value of such installments.
Pursuant to the purchase agreements relating to the issuance and sale of the Series A Units the Series B Units and Series C Units, the Company was required to and did notify the holders of the Series A Preferred Stock, Series B Preferred Stock and Series and the C Preferred Stock of the closing of the sale of the Series D Units,
and following receipt thereof such holders of Series A Preferred Stock, Series B Preferred Stock and the Series C preferred Stock will be entitled, pursuant to the “most favored nation” provisions contained in their respective purchase agreements, to elect to amend the terms of their Series A Units, Series B Units and Series C units, respectively, to match the terms of the Series D Units. The Company is obligated to amend the terms of any of Series A Units or Series B Units or Series C units who timely makes such election and tenders its Series A Units or Series B Units or Series C units for exchange. As of the issuance of the consolidated financial statements no Series A or Series B Unit or Series C unit holders have elected to utilize such right.
Upon initial recognition,
common stock
issued together with detachable Series D Warrants (classified as equity) were measured based on the relative fair value basis and were presented each net of the direct issuance expenses that were allocated to them.
|
D.
|
Warrants with down round protection
|
The investor’s remaining Series A Warrants and the placement agent Warrants
(hereinafter "warrants
") have a five-year term commencing on their issuance date. In accordance with their original terms, the Warrants were exercisable at any time at a certain exercise price. These Warrants contain adjustment provisions substantially similar to the adjustment provisions of the Series A Preferred Stock (See Note 10A.2), including provisions requiring an adjustment of the number of shares and the exercise price to the price at which the Company subsequently issues share or other equity-linked financial instruments, if that price is less than the original exercise price of the Warrants (down-round protection). In addition, the Warrants provide for protection for a Buy-In on substantially the same terms as described above with respect to the Series A Preferred Stock. No holder may exercise its Warrants in excess of the Beneficial Ownership Limitation
As a result of future issuances, the exercise price per share and the number of shares of Common Stock issuable upon exercise of each such warrant were adjusted several times.
As of December 31, 2017 the number of warrants with down round protection is 1,443,419, 9,444 and 487,527 and the exercise prices are $4.5, $5.75 and $7.75 respectively.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 10
|
–
|
COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.)
|
|
D.
|
Warrants with down round protection (cont.)
|
The Company has determined its derivative warrant liability to be a Level 3 fair value measurement and has used the Binomial pricing model to calculate its fair value. Because the warrants contain a price protection feature, the probability that the exercise price of the warrants would decrease as the stock price decreased was incorporated into the valuation calculations.
The changes in the fair value of the Level 3 liability are as follows (in US dollars):
|
|
Warrants with Down-Round Protection
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Balance, Beginning of the year
|
|
|
681,970
|
|
|
|
321,695
|
|
Warrants issued as consideration for placement services
|
|
|
353,721
|
|
|
|
308,239
|
|
Stock based compensation to financial advisor
|
|
|
32,880
|
|
|
|
-
|
|
Amount classified out of stockholders’ deficit and presented as Warrants with Down-Round Protection
|
|
|
-
|
|
|
|
341,662
|
|
Change in fair value of Warrants with Down-Round Protection
|
|
|
(300,322
|
)
|
|
|
(289,626
|
)
|
Balance, End of year
|
|
|
768,249
|
|
|
|
681,970
|
|
The key inputs used in the fair value calculations were as follows:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Dividend yield (%)
|
|
|
-
|
|
|
|
-
|
|
Expected volatility (%) (*)
|
|
|
56.59
|
|
|
|
56.59
|
|
Risk free interest rate (%)
|
|
|
1.31
|
|
|
|
0.92
|
|
Expected term of options (years)
|
|
|
0.2 - 4.92
|
|
|
|
1.20 - 4.92
|
|
Exercise price (US dollars)
|
|
|
4.50 – 7.75
|
|
|
|
4.50 - 7.75
|
|
Share price (US dollars) (**)
|
|
|
2.45
|
|
|
|
2.38
|
|
Fair value (US dollars) (***)
|
|
|
0.002 - 0.81
|
|
|
|
0.16 – 0.75
|
|
|
(*)
|
Due to the low trading volume of the Company’s Common Stock, the expected volatility was based on a sample of 254 companies operating in the Healthcare Products industry.
|
|
(**)
|
The Common Stock price, per share reflects the Company’s management’s estimation of the fair value per share of Common Stock as of December 31, 2017, and 2016. In reaching its estimation for such periods, management considered, among other things, a valuation prepared by a third-party valuation firm following the issuance of the Series D Units at December 31, 2017, as applicable to each reporting period.
|
(***)
The below chart reflects the Fair Value for each of the Warrants with down-round Protection that were outstanding as of December 31, 2017 in US dollars.
|
|
Investors
|
|
|
AGI - Series A
|
|
|
AGI -
Series B
|
|
|
AGI - Series C
|
|
|
AGI - Series D
|
|
Total quantity
|
|
|
126,935
|
|
|
|
364,071
|
|
|
|
566,897
|
|
|
|
844,605
|
|
|
|
37,777
|
|
Exercise price
|
|
|
4.5
|
|
|
|
4.5
|
|
|
|
4.5, 7.75
|
|
|
|
4.5, 7.75
|
|
|
|
4.5 5.75, 7.75
|
|
Fair value
|
|
|
0.31
|
|
|
|
0.12
|
|
|
|
0.12 –
0.34
|
|
|
|
0.29
– 0.76
|
|
|
|
0.5 –
0.81
|
|
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 10
|
–
|
COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.)
|
|
E.
|
Stock-based compensation
|
|
1.
|
Grants to non-employees
|
|
a.
|
In connection with the 2010 Offering, the Company issued to the Placement Agent warrants to purchase 45,097 and 84,459 shares, respectively, of the Company's Common Stock, with an exercise price of $6.25 per share, in 2011 and 2010, respectively. The warrants expire on the fifth anniversary of the date on which the shares of Common Stock underlying such warrants are fully registered with the SEC. The warrants include customary adjustment provisions for stock splits, reorganizations and other similar transactions and in addition a down-round protection provision. As a result of the issuance of the Series B Units, pursuant to the terms of the warrants, on August 29, 2014, the exercise price per share of the applicable warrants decreased from $6.25 per share to $5.80 per share and the number of shares of Common Stock issuable upon exercise of each such warrant, in the aggregate, increased to 139,608. As a result of the initial issuance and sale of the Series C Units, on April 8, 2016, the exercise price per share of the
Warrants
decreased again from $5.80 per share to $4.50 per share and the number of shares of Common Stock issuable upon exercise of each Warrants, in the aggregate, increased to 179,939.
|
|
b.
|
In connection with the 2012 Offering, the Company issued to the Placement Agent (a) 5 year warrants to purchase up to 128,277 shares of Common Stock at an exercise price of $5.80 per share and (b) 5 year warrants to purchase up to 128,277 shares of Common Stock at an exercise price of $6.96 per share and (c) 5 year warrants to purchase up to 215 shares of Common Stock at an exercise price of $7.00 per share. Such warrants have substantially the same terms as those issued to the Series A Unit
Purchasers
except that the Placement Agent warrants may also be exercisable on a cashless basis at all times. As a result of the issuance of the Series B Units, pursuant to the terms of the warrants, on August 29, 2014, the exercise price per share of the applicable warrants decreased from $6.96 and $7.00 per share to $5.80 per share and the number of shares of Common Stock issuable upon exercise of each such warrant, in the aggregate, increased such that the aggregate exercise price payable thereunder, after taking into account the decrease in the exercise price, will be equal to the aggregate exercise price prior to such adjustment. As a result of the initial issuance and sale of the Series C Units, on April 8, 2016, the exercise price per share of the
Warrants
decreased again from $5.80 per share to $4.50 per share and the number of shares of Common Stock issuable upon exercise of each
Warrants
, in the aggregate, increased such that the aggregate exercise price payable thereunder, after taking into account the decrease in the exercise price, will be equal to the aggregate exercise price prior to such adjustment. As of December 31, 2017
,
and 2016 the Placement Agent was entitled to an aggregate of 364,071 shares of Common Stock, respectively, at an exercise price of $4.50 in connection with the 2012 Offering.
|
As of December 31, 2017 and 2016, The key inputs used in the fair value calculations of the Series A preferred warrant that were affected by the down-round protection were as follows:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Investors
|
|
|
Placement agent
|
|
|
Investors
|
|
|
Placement agent
|
|
Dividend yield (%)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Expected volatility (%)
|
|
|
56.69
|
|
|
|
56.69
|
|
|
|
56.69
|
|
|
|
56.69
|
|
Risk free interest rate (%)
|
|
|
1.31
|
|
|
|
1.31
|
|
|
|
0.92
|
|
|
|
0.92
|
|
Expected term of options (years)
|
|
|
0.2
|
|
|
|
2
|
|
|
|
1.2
|
|
|
|
3
|
|
Exercise price US dollars
|
|
|
4.5
|
|
|
|
4.5
|
|
|
|
4.5
|
|
|
|
4.5
|
|
Share price (US dollars)
|
|
|
2.45
|
|
|
|
2.45
|
|
|
|
2.38
|
|
|
|
2.38
|
|
Fair value (US dollars)
|
|
|
0.002
|
|
|
|
0.311
|
|
|
|
0.159
|
|
|
|
0.481
|
|
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 10
|
–
|
COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.)
|
|
E.
|
Stock-based compensation (cont.)
|
|
1.
|
Grants to non-employees (cont.)
|
|
c.
|
In connection with the 2016 Offering, the Company issued to the Placement Agent (a) 5-year warrants to purchase up to 555,733 shares of Common Stock at an exercise price of $4.50 per share and (b) 5-year warrants to purchase up to 288,977 shares of Common Stock at an exercise price of $7.75 per share. The terms of the Placement Agent warrants are substantially similar to the terms of the Series C Warrants except that the Placement Agent warrants may also be exercisable on a cashless basis at all times.
|
As of December 31, 2017
,
and 2016, The key inputs used in the fair value calculations of the Series C
preferred warrant
that were affected by the down-round protection were as follows:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Dividend yield (%)
|
|
|
-
|
|
|
|
-
|
|
Expected volatility (%)
|
|
|
56.59
|
|
|
|
56.59
|
|
Risk free interest rate (%)
|
|
|
1.31
|
|
|
|
0.92
|
|
Expected term of options (years)
|
|
|
3.27 - 4.58
|
|
|
|
4.27 - 4.92
|
|
Exercise price (US dollars)
|
|
|
4.50, 7.75
|
|
|
|
4.50, 7.75
|
|
Share price (US dollars)
|
|
|
2.45
|
|
|
|
2.38
|
|
Fair value (US dollars)
|
|
|
0.29 - 0.76
|
|
|
|
0.39 – 0.75
|
|
|
d.
|
In connection with the 2017 Offering, the Company issued to the Placement Agent (a) 5 year warrants to purchase up to 18,889 shares of Common Stock at an exercise price of $4.50 per share, (b) 5 year warrants to purchase up to 9,444 shares of Common Stock at an exercise price of $5.75 per share. and (c) 5-year warrants to purchase up to 9,444 shares of Common Stock at an exercise price of $7.75 per share
.
The terms of the Placement Agent warrants are substantially similar to the terms of the Series D Warrants except that the Placement Agent warrants may also be exercisable on a cashless basis at all times.
|
As of December 31, 2017, the key inputs used in the fair value calculations of the Series D preferred warrant that were affected by the down-round protection were as follows:
|
|
December 31,
2017
|
|
Dividend yield (%)
|
|
|
-
|
|
Expected volatility (%)
|
|
|
56.59
|
|
Risk free interest rate (%)
|
|
|
1.31
|
|
Expected term of options (years)
|
|
|
4.92
|
|
Exercise price (US dollars)
|
|
|
4.50, 5.75, 7.75
|
|
Share price (US dollars)
|
|
|
2.45
|
|
Fair value (US dollars)
|
|
|
0.81, 0.66, 0.5
|
|
2.
Grants to employees
In August 2007, Integrity Israel’s Board of Directors ("Integrity Israel's Board") approved a stock option plan ("Integrity Israel's plan") for the grant, without consideration of options exercisable into ordinary shares of NIS 0.01 par value of Integrity Israel to employees, officers and directors of Integrity Israel.
The exercise price and vesting period for each grantee of options was determined by Integrity Israel's Board and specified in such grantee's option agreement
. The options vested over a period of 1-12 quarters based on each grantee's option agreements. Any option not exercised within 10 years after the date of grant thereof will expire.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 10
|
–
|
COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.)
|
|
E.
|
Stock-based compensation (cont.)
|
2.
Grants to employees (cont.)
In July 2010, following the merger with Integrity Israel, the Company adopted the 2010 Share Incentive Plan (the "2010 Share Incentive Plan"), pursuant to which the Company's Board of Directors is authorized to grant options exercisable into Common Stock of the Company.
The purpose of the 2010 Share Incentive Plan is to offer an incentive to employees, directors, officers, consultants, advisors, suppliers and any other person or entity whose services are considered valuable to the Company, as well as to replace the Integrity Israel Plan and to replace all options granted in the past by Integrity Israel.
Upon the adoption of the 2010 Share Incentive Plan, all options granted under the Integrity Israel's Plan were replaced by options subject to the 2010 Share Incentive Plan on a 1 for 1 basis. As of December 31, 2017, there are 388,033 shares available for future grants under the 2010 Share Incentive Plan.
As of December 31, 2015, the Company had reserved 529,555 shares of Common Stock for issuance under the 2010 Share Incentive Plan. On March 17, 2016, the Company’s Board of Directors approved an amendment to the 2010 Share Incentive Plan to increase the number of shares of the Company’s Common Stock reserved for issuance under the 2010 Share Incentive Plan to 1,000,000 shares. On April 7, 2017, the Company’s Board of Directors approved an additional amendment to the 2010 Share Incentive Plan to increase the number of shares of the Company’s Common Stock reserved for issuance under the 2010 Share Incentive Plan to 5,625,000 shares.
Pursuant to the terms of their respective employment agreements with the Company, in March 2012, the Company issued to Avner Gal, which served on that date as the Company’s Chief Executive Officer, and David Malka, the Company’s Executive Vice President of Operations, options to purchase up to 264,778 and 79,434 shares of Common Stock, respectively. The Options are exercisable at an exercise price of $6.25 per share. The options vested or will vest (as applicable), in 3 equal parts, upon the achievement of each of the following milestones: (i) submission of clinical trials’ results to the Notified Body; (ii) receipt of CE mark approval; (iii) receipt of FDA approval. In the event of a merger and/or acquisition in which one or more of the abovementioned milestones have not yet been met, the options shall be deemed vested on the date of the merger and/or acquisition. All options granted as described above are subject to the terms of the 2010 Share Incentive Plan.
On January 1,2016, the Company granted its Chief Operations Officer options to purchase up to 16,000 shares of the Company’s
common stock
, at an exercise price of $4.75 per share. The Options will vest in eight equal quarterly installments, with the first such installment to vest on June 30, 2016.
On March 17, 2016, the Company granted each one of three of its director’s options to purchase up to an aggregate of 26,666 shares of the Company’s Common Stock, at an exercise price of $4.50 per share. Each director’s option grant will vest in eight equal quarterly increments of 3,333 each (subject to the director’s continued service as of each such date) commencing with the second quarter of 2016.
On November 15, 2016, the Company granted each one of its two other directors options to purchase up to an aggregate of 26,666 shares of the Company’s Common Stock, at an exercise price of $4.50 per share. Each director’s option grant will vest in eight equal quarterly increments of 3,333 each (subject to the director’s continued service as of each such date) commencing on February 15, 2017.
Effective April 7, 2017, the Company entered into an amendment to the employment agreement (the “Graham Employment Amendment”) with John Graham, whom the Company appointed as Chief Executive Officer on March 20, 2017, to modify the base compensation provision and the equity compensation provision under that certain Employment Agreement, dated March 20, 2017 (the “Graham Effective Date”), by and between the Company and Mr. Graham. Pursuant to the terms of the Graham Employment Amendment the Company agreed, among other things to, (a) grant Mr. Graham an option to purchase up to 1,673,996 shares of Common Stock of the Company having an exercise price per share equal to $4.50 (the “$4.50 Options”) whereby (1) 307,754 of the $4.50 Options will vested immediately, (2) 923,262 of the $4.50 Options will vest on the six month anniversary of the Graham Effective Date, and (3) the remaining 442,980 of the $4.50 Options will vest on the two year anniversary of the Graham Effective Date
, (b)
grant Mr. Graham an option to purchase up to 559,414 shares of Common Stock of the Company having an exercise price per share equal to $5.41 which shall vest in equal monthly installments over three year period following the Effective Date. And (c) grant Mr. Graham an option to purchase up to 844,130 shares of Common Stock of the Company having an exercise price per share equal to $7.75 which shall vest in equal monthly installments over three year period following the Effective Date.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 10
|
–
|
COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.)
|
|
E.
|
Stock-based compensation (cont.)
|
|
2.
|
Grants to employees (cont.)
|
Effective April 7, 2017, the Company entered into an amendment to the employment agreement (the “Graham Employment Amendment”) with John Graham, whom the Company appointed as Chief Executive Officer on March 20, 2017, to modify the base compensation provision and the equity compensation provision under that certain Employment Agreement, dated March 20, 2017 (the “Graham Effective Date”), by and between the Company and Mr. Graham. Pursuant to the terms of the Graham Employment Amendment the Company agreed, among other things to, (a) grant Mr. Graham an option to purchase up to 1,673,996 shares of Common Stock of the Company having an exercise price per share equal to $4.50 (the “$4.50 Options”) whereby (1) 307,754 of the $4.50 Options will vested immediately, (2) 923,262 of the $4.50 Options will vest on the six month anniversary of the Graham Effective Date, and (3) the remaining 442,980 of the $4.50 Options will vest on the two year anniversary of the Graham Effective Date
, (b)
grant Mr. Graham an option to purchase up to 559,414 shares of Common Stock of the Company having an exercise price per share equal to $5.41 which shall vest in equal monthly installments over three year period following the Effective Date. And (c) grant Mr. Graham an option to purchase up to 844,130 shares of Common Stock of the Company having an exercise price per share equal to $7.75 which shall vest in equal monthly installments over three year period following the
Graham
Effective Date.
Effective April 7, 2017, Integrity Israel entered into an amended and restated personal employment agreement (the “Malka Employment Agreement”) with David Malka for his continued service as Vice President of Operations of the Company and Integrity Israel, effective as of March 20, 2017 (the “Malka Effective Date”). Pursuant to the terms of the Malka Employment Agreement, the Company agreed, among other things to (a) modify the terms of 26,478 option to purchase Common Stock at an exercise price per share equal to $6.25 whereby the unvested portion of such options will accelerate and will be immediately exercisable, effective as of the Malka Effective Date (since the original performance conditions were not expected to be satisfied as of the date of the modification of the terms, the fair value of such grant was measured based on the fair value of the modified award at the modification date); and (b) grant Mr. Malka 361,875 additional option to purchase Common Stock at an exercise price per share equal to $4.50 which shall vest on the two year anniversary of the Malka Effective Date.
On June 7, 2017, the Board appointed David Podwalski as the Chief Commercial Officer of the Company, and approved a grant of stock option to purchase shares of Common Stock equal to 1% of the total fully diluted shares of Common Stock as of the Podwalski Effective Date (290,585 options) , with an exercise price of $4.50 per share or the fair market value of a share of Common Stock on the grant date, whichever is greater, vesting monthly over a three year period commencing on the Podwalski Effective Date, subject to his continued employment through and on each such vesting date.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 10
|
–
|
COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.)
|
|
E.
|
Stock-based compensation (cont.)
|
|
2.
|
Grants to employees (cont.)
|
In September 2017, the Compensation Committee and the Board of Directors approved a grant of stock options to Sami Sassoun the Company’s CFO and Eugene Naidis’s the Company’s VP of Research and Development equating to 1% of the fully diluted number of shares of the Company after the closing of the offering of Series C Units (292,924 options each), with a strike price of US$4.50, with three-year monthly vesting commencing on the first month after the effective date.
The aggregate intrinsic value of the awards outstanding as of December 31, 2017, 2016 and 2015 was $0, $14,368 and $12,845, respectively. Such amount represents the total intrinsic value based on the Company’s management’s estimation of the fair value per share of Common Stock based among other things, a valuation prepared by a third-party valuation firm following the issuance of the Series C Units and Series B Units, as applicable.
The following tables present a summary of the status of the grants to employees, officers and directors as of December 31, 2017, 2016 and 2015:
|
|
Number
|
|
|
Weighted average exercise price (US$)
|
|
Balance outstanding as of December 31,2014
|
|
|
450,847
|
|
|
|
5.85
|
|
Exercised during 2015
|
|
|
(19,769
|
)
|
|
|
1.82
|
|
Forfeited during 2015
|
|
|
(17,605
|
)
|
|
|
6.01
|
|
Balance outstanding as of December 31,2015
|
|
|
413,473
|
|
|
|
6.04
|
|
Balance exercisable as of December 31,2015
|
|
|
293,736
|
|
|
|
5.95
|
|
Granted during 2016
|
|
|
149,330
|
|
|
|
4.53
|
|
Balance outstanding as of December 31,2016
|
|
|
562,803
|
|
|
|
5.64
|
|
Balance exercisable as of December 31,2016
|
|
|
334,735
|
|
|
|
5.81
|
|
Granted during 2017
|
|
|
4,740,318
|
|
|
|
5.22
|
|
Forfeited during 2017
|
|
|
(66,154
|
)
|
|
|
3.93
|
|
Balance outstanding as of December 31,2017
|
|
|
5,236,967
|
|
|
|
5.28
|
|
Balance exercisable of December 31,2017
|
|
|
2,428,716
|
|
|
|
5.28
|
|
The following tables summarize information about options outstanding at December 31, 2017:
Exercise
price (US$)
|
|
|
Outstanding at December 31, 2017
|
|
|
Weighted average remaining contractual life (years)
|
|
|
Exercise
price (US$)
|
|
|
Exercisable at December 31, 2017
|
|
|
Weighted average remaining contractual life (years)
|
|
|
6.25
|
|
|
|
351,712
|
|
|
|
4.19
|
|
|
|
6.25
|
|
|
|
351,712
|
|
|
|
4.19
|
|
|
6.02
|
|
|
|
4,273
|
|
|
|
0.03
|
|
|
|
6.02
|
|
|
|
4,273
|
|
|
|
0.03
|
|
|
7.00
|
|
|
|
22,000
|
|
|
|
6.50
|
|
|
|
7.00
|
|
|
|
22,000
|
|
|
|
6.50
|
|
|
4.75
|
|
|
|
12,000
|
|
|
|
8.01
|
|
|
|
4.75
|
|
|
|
12,000
|
|
|
|
8.01
|
|
|
4.50
|
|
|
|
79,998
|
|
|
|
8.21
|
|
|
|
4.50
|
|
|
|
79,998
|
|
|
|
8.21
|
|
|
4.50
|
|
|
|
26,666
|
|
|
|
8.88
|
|
|
|
4.50
|
|
|
|
22,793
|
|
|
|
8.88
|
|
|
4.50
|
|
|
|
1,673,996
|
|
|
|
9.21
|
|
|
|
4.50
|
|
|
|
1,231,016
|
|
|
|
9.21
|
|
|
5.41
|
|
|
|
559,414
|
|
|
|
9.21
|
|
|
|
5.41
|
|
|
|
0
|
|
|
|
0
|
|
|
7.75
|
|
|
|
844,130
|
|
|
|
9.21
|
|
|
|
7.75
|
|
|
|
0
|
|
|
|
0
|
|
|
4.50
|
|
|
|
661,875
|
|
|
|
9.26
|
|
|
|
4.50
|
|
|
|
304,615
|
|
|
|
9.26
|
|
|
7.75
|
|
|
|
50,000
|
|
|
|
9.26
|
|
|
|
7.75
|
|
|
|
16,667
|
|
|
|
9.26
|
|
|
4.50
|
|
|
|
74,470
|
|
|
|
9.41
|
|
|
|
4.50
|
|
|
|
65,709
|
|
|
|
9.41
|
|
|
4.50
|
|
|
|
290,585
|
|
|
|
9.48
|
|
|
|
4.50
|
|
|
|
140,660
|
|
|
|
9.48
|
|
|
4.50
|
|
|
|
585,848
|
|
|
|
9.71
|
|
|
|
4.50
|
|
|
|
177,273
|
|
|
|
9.71
|
|
|
|
|
|
|
5,236,967
|
|
|
|
|
|
|
|
|
|
|
|
2,428,716
|
|
|
|
|
|
As of December 31, 2017, approximately $1,840,329 of unrecognized compensation costs are expected to be recognized during the year ending December 31, 2018, 2019 and 2020.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 10
|
–
|
COMMON STOCK, PREFERRED STOCK AND WARRANTS WITH-DOWN ROUND PROTECTION (cont.)
|
|
E.
|
Stock-based compensation (cont.)
|
|
2.
|
Grants to employees (cont.)
|
The fair value of options granted to employees was estimated at the dates of grant using the Black-Scholes option pricing model. The following are the data and assumptions used:
|
|
2017
|
|
|
2016
|
|
Dividend yield (%)
|
|
|
0
|
|
|
|
0
|
|
Expected volatility (%) (*)
|
|
|
56.59
|
|
|
|
62.16
|
|
Risk free interest rate (%)
|
|
|
0.92
|
|
|
|
1.08
|
|
Expected term of options (years)
|
|
|
5-10.5
|
|
|
|
6
|
|
Exercise price (US dollars)
|
|
|
4.50 - 7.75
|
|
|
|
4.50, 4.75
|
|
Stock price (US dollars) (**)
|
|
|
2.38
|
|
|
|
2.38
|
|
Fair value (US dollars)
|
|
|
0.58-1.28
|
|
|
|
1.01, 098
|
|
|
(*)
|
Due to the low trading volume of the Company’s Common Stock, the expected volatility was based on a sample of 254 companies operating in the Healthcare Products industry.
|
|
(**)
|
The Common Stock price, per share for the
year
ended December 31, 2017 and 2016 reflects the Company’s management’s estimation of the fair value per share of Common Stock. In reaching its estimation for December 31, 2017, management considered, among other things, a valuation prepared by a third-party valuation firm following the issuance of the 2016 Offering.
In reaching its estimation for December 31, 2017, management considered, among other things, a valuation prepared by a third-party valuation firm following the issuance of the Series C Units.
|
NOTE 11
|
–
|
RESEARCH AND DEVELOPMENT EXPENSES
|
|
|
US dollars
|
|
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Salaries and related expenses
|
|
|
1,587,567
|
|
|
|
1,510,491
|
|
|
|
1,279,216
|
|
Professional fees
|
|
|
5,169
|
|
|
|
58,954
|
|
|
|
71,930
|
|
Regulations related expenses
|
|
|
374,049
|
|
|
|
620,535
|
|
|
|
488,536
|
|
Patents
|
|
|
99,224
|
|
|
|
132,344
|
|
|
|
159,624
|
|
Materials*
|
|
|
972,779
|
|
|
|
346,238
|
|
|
|
153,669
|
|
Depreciation
|
|
|
33,786
|
|
|
|
|
|
|
|
19,133
|
|
Travel expenses
|
|
|
31,973
|
|
|
|
|
|
|
|
39,324
|
|
Vehicle maintenance
|
|
|
66,750
|
|
|
|
91,935
|
|
|
|
54,936
|
|
Other
|
|
|
36,169
|
|
|
|
22,601
|
|
|
|
1,977
|
|
|
|
|
3,207,466
|
|
|
|
2,881,817
|
|
|
|
2,268,345
|
|
|
·
|
Includes a reserve for slow moving inventory. See Note 3
|
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 12
|
–
|
SELLING AND MARKETING EXPENSES
|
|
|
US dollars
|
|
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related expenses
|
|
|
1,272,830
|
|
|
|
707,111
|
|
|
|
318,716
|
|
Professional fees
|
|
|
115,324
|
|
|
|
271,984
|
|
|
|
416,575
|
|
Travel & expenses
|
|
|
51,623
|
|
|
|
76,022
|
|
|
|
178,167
|
|
Exhibitions and Shows
|
|
|
85,391
|
|
|
|
72,798
|
|
|
|
175,176
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
38,800
|
|
|
|
|
1,525,168
|
|
|
|
1,127,915
|
|
|
|
1,127,434
|
|
NOTE 13
|
–
|
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
US dollars
|
|
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related expenses
|
|
|
4,214,606
|
|
|
|
938,203
|
|
|
|
584,058
|
|
Professional fees
|
|
|
1,832,165
|
|
|
|
1,046,987
|
|
|
|
573,815
|
|
Travel & expenses
|
|
|
184,611
|
|
|
|
130,533
|
|
|
|
114,783
|
|
Depreciation
|
|
|
34,092
|
|
|
|
27,076
|
|
|
|
25,759
|
|
Insurance
|
|
|
93,746
|
|
|
|
63,182
|
|
|
|
63,146
|
|
Vehicle maintenance
|
|
|
73,459
|
|
|
|
51,818
|
|
|
|
41,180
|
|
|
|
|
6,432,679
|
|
|
|
2,257,799
|
|
|
|
1,402,741
|
|
NOTE 14
|
–
|
FINANCING (INCOME) EXPENSES, NET
|
|
|
US dollars
|
|
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Israeli CPI linkage difference on principal of loans from stockholders
|
|
|
3,034
|
|
|
|
(629
|
)
|
|
|
(2,521
|
)
|
Exchange rate differences
|
|
|
25,847
|
|
|
|
27,934
|
|
|
|
38,873
|
|
Change in fair value of Warrants with down-round protection
|
|
|
(300,322
|
)
|
|
|
(289,626
|
)
|
|
|
(149,092
|
)
|
Interest expenses on credit from banks and other
|
|
|
24,396
|
|
|
|
16,216
|
|
|
|
15,205
|
|
Loss on partial extinguishment of Series A Preferred Stock and Series A Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
1,284,354
|
|
|
|
|
(247,045
|
)
|
|
|
(246,105
|
)
|
|
|
1,186,819
|
|
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
|
A.
|
Measurement of results for tax purposes under the Israeli Income Tax (Inflationary Adjustments) Law, 1985 (the “Inflationary Adjustment Law”)
|
Commencing January 1, 2008, the results of operations of Integrity Israel for tax purposes are measured on a nominal basis.
|
B.
|
Changes in the Israeli corporate tax rates
|
On January 4, 2016, the Israeli parliament passed the Law for Amendment of the Income Tax Ordinance No. 216, which, among other things reduced the standard Israeli corporate income tax rate from 26.5% to 25% effective as of January 2016,
Furthermore, on December 22, 2016 the Knesset plenum passed the Economic Efficiency Law (Legislative Amendments for Achieving Budget Objectives in the Years 2017 and 2018) – 2016, by which, inter alia, the corporate tax rate would be reduced from 25% to 23% in two steps. The first step would be to reduce the corporate tax rate to 24% as of January 2017 and the second step would be to reduce the corporate tax rate to 23% as of January 2018.This change has no impact on the financial statements.
For federal, state and local income tax purposes the Company remains open for examination by the tax authorities for the tax years from 2014 through 2016 under the general statute of limitations.
Notwithstanding, pursuant and subject to the provisions of article 145 of the Income Tax Ordinance, Integrity Israel’s tax returns that were filled with the tax authority up to and including 2012 are considered final.
|
D.
|
Carryforward tax losses
|
As of December 31, 2017, the Company had cumulative net operating losses (NOL) for US federal purposes of approximately $7.0 million that will expire between the years 2032-2036. Integrity Israel has losses carry forward balances for Israeli income tax purposes of approximately $33 million to offset against future taxable income for an indefinite period of time.
|
E.
|
The following is a reconciliation between the theoretical tax on pre-tax income, at the tax rate applicable to the Company (federal tax rate) and the tax expense reported in the financial statements:
|
|
|
US dollars
|
|
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss)
|
|
|
(10,328,806
|
)
|
|
|
(5,409,737
|
)
|
|
|
(5,842,172
|
)
|
Federal tax rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
Income tax expenses (benefit) computed at the ordinary tax rate
|
|
|
(3,511,794
|
)
|
|
|
(1,839,311
|
)
|
|
|
(1,986, 338
|
)
|
Non-deductible expenses
|
|
|
41,829
|
|
|
|
34,500
|
|
|
|
31,050
|
|
Stock-based compensation
|
|
|
908,041
|
|
|
|
17,562
|
|
|
|
4,503
|
|
Warrants with down round protection
|
|
|
(102,110
|
)
|
|
|
(98,473
|
)
|
|
|
(50,691
|
)
|
Loss on partial extinguishment of Series A Preferred Stock and Series A Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
436,680
|
|
Tax in respect of differences in corporate tax rates
|
|
|
524,134
|
|
|
|
396,956
|
|
|
|
340,263
|
|
Losses and timing differences in respect of which no deferred taxes assets were recognized
|
|
|
2,139,900
|
|
|
|
1,488,766
|
|
|
|
1,224,533
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 15
|
–
|
INCOME TAX (cont.)
|
|
F.
|
Deferred taxes result principally from temporary differences in the recognition of certain revenue and expense items for financial and income tax reporting purposes. Significant components of the Group's future tax assets are as follows:
|
|
|
US dollars
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Composition of deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Provision for employee-related obligation
|
|
|
21,086
|
|
|
|
28,526
|
|
|
|
23,494
|
|
Non-capital loss carry forwards
|
|
|
10,354,385
|
|
|
|
7,823,828
|
|
|
|
6,233,314
|
|
Valuation allowance
|
|
|
(10,375,471
|
)
|
|
|
(7,852,354
|
)
|
|
|
(6,256,808
|
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
NOTE 16
|
–
|
INCOME (LOSS) PER SHARE
|
The loss and the weighted average number of shares used in computing basic and diluted loss per share for the years ended December 31, 2017, 2016 and 2015, are as follows:
|
|
US dollars
|
|
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) for the year
|
|
|
(10,328,806
|
)
|
|
|
(5,409,737
|
)
|
|
|
(5,842,172
|
)
|
Cash dividend on Series A Preferred Stock
|
|
|
(14,950
|
)
|
|
|
(18,229
|
)
|
|
|
(57,061
|
)
|
Stock dividend on Series B Preferred Stock
|
|
|
(854,647
|
)
|
|
|
(647,215
|
)
|
|
|
(390,219
|
)
|
Stock dividend on Series C Preferred Stock
|
|
|
(566,033
|
)
|
|
|
(152,480
|
)
|
|
|
-
|
|
Income (loss) for the period attributable to common stockholders
|
|
|
(11,764,436
|
)
|
|
|
(6,227,661
|
)
|
|
|
(6,289,452
|
)
|
|
|
Number of shares
|
|
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Common shares used in computing Basic income (loss) per share
|
|
|
6,285,324
|
|
|
|
5,788,842
|
|
|
|
5,476,870
|
|
Common shares used in computing Diluted income (loss) per share
(*)
|
|
|
6,285,324
|
|
|
|
5,788,842
|
|
|
|
5,476,870
|
|
Total weighted average number of Common shares related to outstanding convertible Preferred Stock, options and warrants excluded from the calculations of diluted income (loss) per share (**)
|
|
|
21,300,975
|
|
|
|
12,745,874
|
|
|
|
9,431,728
|
|
|
(*)
|
In applying the treasury method, the average market price of Common Stock was based on management estimate. For
December 31, 2017, management considered, among other things, a valuation prepared by a third-party valuation firm following the issuance of the Series D Units.
For December 31, 2016 and 2015, management estimation considered, among other things, a valuation prepared by a third-party valuation firm following the issuance of the Series C Units and Series B Units (See Note 10C).
|
|
(**)
|
The Company excludes from the calculation of diluted income (loss) per share, shares that will be issued upon the exercise of options and warrants with exercise prices, that are greater than the estimated average market value of the Company’s Common Stock
and shares issuable upon conversion of Preferred Stock because their effect would be anti-dilutive. Outstanding shares that will be issued upon conversion or exercise, as applicable, of all convertible Preferred Stock, stock options and warrants, have been excluded from the calculation of the diluted net loss per share for all the reported periods for which net loss was reported because the effect of the common shares issuable as a result of the exercise or conversion of these instruments was anti-dilutive.
|
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 17
|
–
|
SEGMENT INFORMATION
|
The Company operates in one operating segment, the following is a summary of operations within geographic areas:
|
|
Year ended December 31,
|
|
Revenues based on the customer’s location:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
504,190
|
|
|
|
431,772
|
|
|
|
13,420
|
|
Asia and Pacific
|
|
|
85,272
|
|
|
|
179,917
|
|
|
|
129,747
|
|
Total
|
|
|
589,462
|
|
|
|
611,689
|
|
|
|
143,167
|
|
All long-lived assets are owned by Integrity Israel and are located in Israel.
NOTE 18
|
–
|
RELATED PARTIES
|
|
A.
|
Avner Gal, the beneficial owner of approximately 5.77% of the Company's outstanding Common Stock as of December 31, 2017, entered into an employment agreement with Integrity Israel in July 2010 pursuant to which Mr. Gal agreed to continue to serve as the chief executive officer and managing director of Integrity Israel. The agreement was approved by the board of directors and stockholders of Integrity Israel. Mr. Gal’s employment agreement provides for an annual salary of approximately $134,228, $125,722 and $123,457 (NIS 480,000) for the
year
ended December 31, 2017, 2016 and 2015
,
respectively. In addition, Mr. Gal was entitled to an annual bonus to be determined by the board of directors and an additional sum provided that Mr. Gal reaches certain milestones approved by the board, as well as the payment of certain social and insurance benefits and the use of a car. Effective April 7, 2017 (the “Gal Effective Date”), the Company and Integrity Israel entered into a letter agreement with Avner Gal whereby Mr. Gal separated from his employment and directorship at the Company to act as a part time consultant to the Company (the “Gal Agreement”). Pursuant to the terms of the Gal Agreement, and as consideration for Mr. Gal’s separation from employment and services as a consultant, the Company agreed, among other things, to (a) pay Mr. Gal an amount equal to his salary and other financial benefits Mr. Gal was entitled to receive under the Employment Agreement entered into by and between Integrity Israel and Mr. Gal in October 2010 (the “Gal Employment Agreement”), that would have been paid to Mr. Gal during the Notice Period (as defined in the Gal Employment Agreement), in lieu of such prior notice; (b) modify the Adjustment Period, pursuant to section 19 of the Gal Employment Agreement, to 24 Salaries (as defined in the Gal Employment Agreement), including all the benefits mentioned in the Gal Employment Agreement, provided Mr. Gal does not work or provide services to a company in direct competition with the Company; (c) accelerate the vesting of 88,259 outstanding unvested options to purchase Common Stock, at an exercise price per share equal to $6.25, held by Mr. Gal as of the Gal Effective Date (since the original performance conditions were not expected to be satisfied as of the date of the modification of the terms, the fair value of such grant was measured based on the fair value of the modified award at the modification date; such amount was measured as approximately $51,000); (d) extend the term of all outstanding vested and unvested options held by Mr. Gal to be exercisable for five years from the Gal Effective Date (with respect to all vested options, at the modification date the company recognized compensation cost in an amount equal to the excess amount of the fair value of the modified award as of the modification date over the fair value of the original award immediately); and (e) grant Mr. Gal an option to purchase up to 300,000 shares of Common Stock of the Company having an exercise price per share equal to $4.50 and an option to purchase up to an additional 50,000 shares of Common Stock of the Company having an exercise price per share equal to $7.75. These options vest monthly over a 24 months period following the date of grant. Mr. Gal is subject to a non-compete and a confidentiality agreement during the term of the agreement and for one year thereafter.
|
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 18
|
–
|
RELATED PARTIES (cont.)
|
|
B.
|
David Malka, the beneficial owner of 2.43% of the Company's outstanding Common Stock as of December 31, 2017, entered into an employment agreement with Integrity Israel in July 2010 pursuant to which Mr. Malka agreed to continue to serve as the vice president of operations of Integrity Israel. The agreement was approved by the board of directors and stockholders of Integrity Israel. Mr. Malka’s employment agreement provides for an annual salary of approximately $67,114, $63,114 and $61,728 (NIS 240,000) for the
year
ended December 31, 2017, 2016 and 2015 respectively. In addition, Mr. Malka is entitled to an annual bonus to be determined by the Board of Directors in its sole discretion and an additional sum provided that Mr. Malka reaches certain milestones approved by the Board, as well as the payment of certain social and insurance benefits and the use of a group three car. During the
year
ended December 31, 2017, 2016 and 2015 the Company did not pay Mr. Malka any bonuses. Effective April 7, 2017, Integrity Israel entered into an amended and restated personal employment agreement (the “Malka Employment Agreement”) with David Malka for his continued service as Vice President of Operations of the Company and Integrity Israel, effective as of March 20, 2017 (the “Malka Effective Date”). Pursuant to the terms of the Malka Employment Agreement, Mr. Malka (a) receives a base monthly salary of NIS 20,000 (approximately $5,508 based on an exchange rate of 3.63 NIS / 1 USD in effect on August 8, 2017), which may increase to NIS 35,000 per month (approximately $9,639 using the same exchange rate) in the event certain performance milestones are met (the “Malka Base Salary”); (b) is eligible to earn an annual performance bonus between 420-864% of the Malka Base Salary, subject to certain performance criteria to be established by the Board of Directors within the first ninety (90) days of each fiscal year; (c) is eligible to earn a retention bonus equal to 60% of the aggregate Malka Base Salary earned through the one-year anniversary of the Malka Effective Date, payable thirty days following the one-year anniversary of the Malka Effective Date and provided that Mr. Malka remains employed with Integrity Israel through and on the one-year anniversary of the Malka Effective Date; (d) received a modification to the terms of his option to purchase Common Stock at an exercise price per share equal to $6.25 whereby the unvested portion of such options will accelerate and will be immediately exercisable, effective as of the Malka Effective Date (since the original performance conditions were not expected to be satisfied as of the date of the modification of the terms, the fair value of such grant was measured based on the fair value of the modified award at the modification date); and (e) received certain additional equity awards pursuant to the Plan and under the terms and conditions as set forth in the Malka Employment Agreement. In addition, the Malka Employment Agreement provides for the payment of certain social benefits and the use of a company car.
|
NOTE 19
|
–
|
MAJOR
CUSTOMERS
AND VENDORS
|
For the year ended December 31, 2017, sales to two customers represented approximately 94% of net sales and purchases from two vendors represented approximately 57% of net purchases.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 20
|
–
|
SUBSEQUENT EVENTS
|
A.
|
On January
11
, 2018, Integrity Applications, Inc., a Delaware corporation (the “Company”), entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain accredited investors (the “Purchasers”) pursuant to which, on January 18, 2018, the Company issued to the Purchasers an aggregate of 70,000 units of the Company (each a “Unit” and, collectively, the “Units”), each consisting of (a) one share (collectively, the “Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), (b) a five year warrant to purchase, at an exercise price of $4.50 per share, one share of Common Stock (collectively, the “Series D-1
Warrants”), (c) a five year warrant to purchase, at an exercise price of $5.75 per share, one share of Common Stock (collectively, the “Series D-2 Warrants”), and (d) a five year warrant to purchase, at an exercise price of $7.75 per share, one share of Common Stock (collectively, the “Series D-3 Warrants”, and together with the Series D-1 Warrants and Series D‑2 Warrants, the “Warrants”). The Company received aggregate gross proceeds of $315,000 from the sale of the Units pursuant to the Purchase Agreement.
|
Pursuant to a placement agent agreement (the “Placement Agent Agreement”) with the placement agent for the offering of the Units (the “Placement Agent”), at
the
closing of the sale of the
Units the Company paid the Placement Agent,
as a commission, an amount equal to 10% of the aggregate sales price of the
Units, plus a non-accountable expense allowance equal to 3% of the aggregate sales price of the
Units. In addition, pursuant to the Placement Agent Agreement, the Company is required to issue to the Placement Agent: (a
) 5 year warrants to purchase up to 14,000 shares of Common Stock at an exercise price of $4.50 per share
(b
) 5 year warrants to purchase up to 7,000 shares of Common Stock at an exercise price of $5.75 per share
and (
C
) 5 year warrants to purchase up to 7,000 shares of Common Stock at an exercise price of $7.75 per share. The terms of the Placement Agent warrants will be substantially similar to the Warrants except that the Placement Agent warrants will also be exercisable on a cashless basis and will include full ratchet anti-dilution protection
.
B.
|
On February 8, 2018,
Integrity Applications, Inc., a Delaware corporation (
the
“
Company
”),
entered into a Securities Purchase Agreement
(the “Purchase Agreement”)
with certain accredited investors
(the “Purchasers”)
pursuant to which, on February 8, 2018, the Company issued to the Purchasers an aggregate of 54,444
units
of the Company
(each a “Unit” and, collectively, the “Units”), each consisting of (a) one share (collectively, the “Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), (b) a five year warrant to purchase, at an exercise price of $4.50 per share, one share of Common Stock (collectively, the “Series D-1 Warrants”), (c) a five year warrant to purchase, at an exercise price of $5.75 per share, one share of Common Stock (collectively, the “Series D-2 Warrants”), and (d) a five year warrant to purchase, at an exercise price of $7.75 per share, one share of Common Stock (collectively, the “Series D-3 Warrants”, and together with the Series D-1 Warrants and Series D‑2 Warrants, the “Warrants”).
The Company received aggregate gross proceeds of $245,000 from the sale of the
Units pursuant to the Purchase Agreement
.
|
Pursuant to
a placement agent agreement (the “
Placement Agent Agreement
”) with the placement agent for the offering of the Units (the “Placement Agent”), at the
closing of the sale of the Units the Company paid the Placement Agent, as a commission, an amount equal to 10% of the aggregate sales price of the Units, plus a non-accountable expense allowance equal to 3% of the aggregate sales price of the
Units. In addition, pursuant to the Placement Agent Agreement, the Company is required to issue to the Placement Agent: (a
) 5 year warrants to purchase up to 10,889 shares of Common Stock at an exercise price of $4.50 per share
(b
) 5 year warrants to purchase up to 5,444 shares of Common Stock at an exercise price of $5.75 per share and (
C
) 5 year warrants to purchase up to 5,444 shares of Common Stock at an exercise price of $7.75 per share.
The terms of the Placement Agent warrants will be substantially similar to the Warrants except that the Placement
Agent warrants will also be exercisable on a cashless basis and will include full ratchet anti-dilution protection
.
INTEGRITY APPLICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 20
|
–
|
SUBSEQUENT EVENTS (Cont.)
|
C.
|
On March
1
, 2018, Integrity Applications, Inc., a Delaware corporation (the “Company”), entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain accredited investors (the “Purchasers”) pursuant to which, on March 2, 2018, the Company issued to
|
Purchasers
an aggregate of 311,112
units
of the Company
(each a “Unit” and, collectively, the “
Units
”), each consisting of (a) one share (collectively, the “Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), (b) a five year warrant to purchase, at an exercise price of $4.50 per share, one share of Common Stock (collectively, the “Series D-1 Warrants”), (c) a five year warrant to purchase, at an exercise price of $5.75 per share, one share of Common Stock (collectively, the “Series D-2 Warrants”), and (d) a five year warrant to purchase, at an exercise price of $7.75 per share, one share of Common Stock (collectively, the “Series D-3 Warrants”, and together with the Series D-1 Warrants and Series D‑2 Warrants, the “Warrants”).
The Company received aggregate gross proceeds of $1,400,000 from the sale of the
Units pursuant to the Purchase Agreement
.
Pursuant to
a placement agent agreement (the “
Placement Agent Agreement
”) with the placement agent for the offering of the Units (the “Placement Agent”), at the
closing of the sale of the Units the Company paid the Placement Agent, as a commission, an amount equal to 10% of the aggregate sales price of the Units, plus a non-accountable expense allowance equal to 3% of the aggregate sales price of the Units
. In addition, pursuant to the Placement Agent Agreement, the Company is required to issue to the Placement Agent: (a
) 5 year warrants to purchase up to 62,222 shares of Common Stock at an exercise price of $4.50 per share
(b
) 5 year warrants to purchase up to 31,111 shares of Common Stock at an exercise price of $5.75 per share and (
C
) 5 year warrants to purchase up to 31,111 shares of Common Stock at an exercise price of $7.75 per share.
The terms of the Placement Agent warrants will be substantially similar to the Warrants except that the Placement
Agent warrants will also be exercisable on a cashless basis and will include full ratchet anti-dilution protection
.
D.
|
On April 7, 2017, the Board approved an amendment to the 2010 Incentive Compensation Plan of the Company (the “Plan”) to increase the number of shares of the Company’s Common Stock reserved for issuance under the Plan from 1,000,000 shares to 5,625,000 shares.
On February 15, 2018, the Board approved another amendment to the Plan to further increase the number of shares of common stock reserved for issuance under the Plan to 7,000,000 shares. On March 23, 2018, stockholders of the Company approved the two amendments to the Plan adopted by the Board as of April 7, 2017 and February 15, 2018.
|
F - 45